You’re not the only one taking a “new year, new me” approach to 2020. Even the IRS is changing things up — it just debuted a new Form W-4.
Form W-4, the official name for the Employee’s Withholding Certificate, is a document workers fill out so their employers can determine how much federal income tax to deduct from their paychecks. It’s widely used, and it’s long needed an overhaul. This redesign, necessitated by the 2017 Tax Cuts and Jobs Act, is the first big update Form W-4 has gotten in roughly three decades, according to the New York Times.
The IRS says the makeover “reduces the form’s complexity and increases the transparency and accuracy of the withholding system.” Rather than forcing taxpayers to fill out “complicated worksheets,” they’ll answer “more straightforward questions.”
But what does that mean for you and your taxes? Well, if you do the new Form W-4 voluntarily and get a more precise withholding number, your tax refund will be lower… and that’s actually good thing.
Here’s a brief guide to everything you need to know about the new Form W-4.
What’s Different in the New W-4?
One major shift is that Form W-4 doesn’t use allowances any more.
Previously, the value of an employee’s allowances was tied to their personal exemptions, or the amount of money each taxpayer could automatically deduct for themselves and their dependents. (For 2017, it was $4,050.)
But personal exemptions were eliminated in the Tax Cuts and Jobs Act. The standard deduction and child tax credit went up instead, according to the Tax Policy Center.
The new Form W-4 calculates withholding by having you complete five steps. Step 1 is just your personal information like your name and Social Security number, and Step 2 is about multiple jobs and spouse work if you have them. Step 3 is for dependents; Step 4 is for other adjustments. Finally, Step 5 is your signature. Not all the steps are required for everyone.
Can I See It?
Who Needs to Fill Out a New W-4?
People who start new jobs in 2020 are required to complete the new form. If you’re with the same employer as in 2019 or before, though, then they’ll just keep doing what they’re doing — determining your withholding based on your most recent Form W-4.
However, it’s not a bad idea to do a “payment checkup,” as suggested by the American Payroll Association. The IRS also recommends you check your withholding whenever you have a big lifestyle change, like if you get married, become divorced or have a baby.
If you do end up wanting to make changes, you’ll need to use the upgraded version of Form W-4.
What Happens If I Screw It Up?
If you don’t withhold enough, you may have to pay a tax bill or face penalties. If you withhold too much, you’re basically letting the government have an interest-free loan.
The IRS says people should increase their withholding if they have more than one job at once, if their spouse also works or if they have extra income from certain sources. Typically, people should decrease their withholding if they qualify for income tax credits or could take certain deductions, like for student loan interest.
Luckily, the IRS has a handy tax withholding estimator online to walk you through everything. But beware: To make sure your results are as accurate as possible, you’ll likely want to have your pay stubs, last year’s tax return and documents from your spouse (if applicable) on hand. As such, using the tool is not necessarily a quick process.
That said, the estimator is intended to help you fill out the Form W-4, so if you’re worried about privacy or confused in general, it may be worth the time.