What you need to know about the new W-4 form

A key tax withholding form has gotten a makeover.

The W-4 form, which tells employers how much federal income tax to withhold from an employee’s paycheck, has gotten an overhaul in 2020 including, most notably, removing the withholding allowances part of the form.

It’s the first major redesign in more than three decades and employers and employees must familiarize themselves with the key changes that took effect Jan. 1.

“It’s short-term causing a lot of confusion,” says Pete Isberg, vice president of government relations at Roseland, New Jersey-based ADP, which offers online payroll, HR and tax services. “But I think when people get used to it, it will be a lot easier and more straightforward than the old form.”

Previously, employees claimed withholding allowances (ie. exemptions) based on factors including their number of dependents, to reduce the amount of tax withheld, Isberg says. The more allowances claimed, the less tax the employer withheld. 

But when the Tax Cuts and Jobs Act eliminated personal and dependent exemptions, and increased both the standard deduction and child tax credit, the form needed to be updated.

It now asks you to multiply the number of qualifying children and other dependents you have by the amount of the federal tax credit.

The new form has a five-step process to help employees more accurately determine withholding,  including areas to address multiple jobs and two-earner families, Isberg says.

 It must be given to any employee hired on or after Jan. 1, says Jose G. Santiago, human resources compliance manager and corporate counsel at Farmingdale-based Alcott HR. Employees who began work before 2020 aren’t required to fill out the form unless they want to make changes to their withholding, he says.

“We’ve gotten some people that prefer this new format because it allows them to have a more specific deduction so at tax time they don’t owe too much or get too much back,” says Santiago. “Some people like to be as close to net zero as possible.”

5 steps for employees

The form is broken down into simplified steps with only Steps 1 and 5 required. Step 1 is personal information such as name, address and Social Security number, and Step 5 is for an employee’s signature and date, says Jennifer Bobé, a senior tax manager at Margolin, Winer and Evens in Uniondale.

Employees fill out steps 2 through 4 if applicable or if they want their withholding to be more exact, she says.

For instance, Step 2 applies if the person has multiple jobs or both the employee and spouse work and they file jointly; Step 3 deals with credits for children and other dependents (credits such as education or foreign tax credits can also be incorporated into this step); and Step 4 permits an employee to factor in additional items such as other income, deductions other than the standard deduction, and additional withholding, Bobé says.

The IRS offers a withholding calculator to help: www.irs.gov/individuals/tax-withholding-estimator, says Ed McWilliams, a director at Cerini & Associates in Bohemia, noting employees should use both the tool and consult with their tax adviser.

It also helps to have last year’s tax return handy, because you’ll need information like your spouse’s income and previous tax credits claimed, he says.

“The instructions are fairly straightforward for an IRS form,” says Christine Ippolito, founding principal at Compass Workforce Solutions, HR consultants in Hauppauge.

And for some it can be simple. For example, if you have no dependents and only work one job, then you only need to complete Step 1 and sign and date the form (Step 5), she says. Your withholding will be based on the standard deduction, with no other adjustments.

To assist employees, companies could hold workshops with a CPA/tax professional who can advise them on how to determine their withholding and provide helpful IRS tutorials/links, Ippolito says.

Compass provides clients a sample letter to give to employees explaining the new form, as well as legally compliant new-hire kits, which include the new form.

Companies should make sure anyone handling these forms is knowledgeable about them, McWilliams says.  “That can help better prepare the employer for questions employees may have,” he says.

Also, it could be helpful for employers to offer new employees additional time and a private room to complete the form, or permit new employees to take it home for completion, Isberg says. Spouses in a two-earner household will need to coordinate, he says, since only one of them should fill out Step 3 and Step 4 of the form. For example, parents who both claim the child tax credit could end up owing a large amount to the IRS.

For more information, see www.adp.com/W42020.