2020 W-4 Form and Tax Withholding: Everything You Need to Know

The Internal Revenue Services made two updates to how we calculate our tax withholding for 2020:

1. This will allow taxpayers to easily update their W-4 and calculate the appropriate amount of tax withholding for their tax returns.
2. In addition to the new forms and tools, an employee’s income tax withholding is no longer based solely on marital status and personal exemption for withholding allowances. 

Learn how to use the redesigned W-4 form and the Tax Withholding Estimator for your returns.

What is a W-4 Form and Why is it Important?

When you start a new job, you’re required to submit a W-4 form, also known as Employee’s Withholding Certificate. A W-4 form helps your employer determine how much tax they should withhold from your paycheck. Your tax withholdings will be sent by your employer to the IRS and will count towards your annual income tax bill when you file for your tax returns.

It’s important to estimate your tax withholdings correctly because the IRS penalizes those who do not gradually pay taxes on their income throughout the year. This can account for large sums with interest and penalties for underpaying your taxes.

However, if you withhold too much,  your monthly income becomes smaller. Therefore, you’re missing out on opportunities to grow your extra money in a savings or retirement account. 

If you don’t submit your W-4, your employer is required to withhold at the highest rate—single and claiming no allowances— per IRS rules. 

Why Did the IRS Redesign the W-4 Form?

The simple answer: to make it easier! The new design makes it more straightforward to make accurate withholding decisions for employees. As a result, it reduces complicated worksheets and makes it easier to calculate your withholdings.

Due to The Tax Cut and Job Acts of 2017, allowances are no longer used because you cannot claim personal or dependency exemptions.

When and How to Fill Out the W-4 Form

• If you started a new job and get paid in 2020, you must use the redesigned form. 
• You want to adjust your withholdings for 2020, you must use the redesigned form. 
• There are no changes from your previous W-4 form, you do not need to do anything.
• Employers are not permitted to require their employees to submit a new form if employees do not wish to.

The new W-4 form (download here) is only 4 pages long. The first page is the only page you need to submit to your employer. Pages 2 through 4 are comprised of instructions on how to calculate your withholdings.

The first page only has five steps, but each step is different depending if you plan to withhold taxes. 

If you do not wish to withhold anything, you only need to do Steps 1 and 5, entering your personal information and signing. 

If tax withholdings apply to you, then you will need to fill out Steps 1 through 5. Below, we will go through each step and how it applies to you. 

Steps to Filling Out the W-4 Form

Step 1: Fill out your standard personal information as you would for all federal tax forms. 

Step 2: Shows you how to calculate your withholdings. You can use the IRS Tax Withholding Estimator (which is also new for 2020) or  the worksheets provided on page 3 to calculate manually and enter the result on Step 4(c) Extra withholding. 

Step 3: Complete only if you have children under 17 or have other dependents. 

Example: John and Mary have a combined household income of $250,000 and will be filing jointly. They have two children under 17 and they support Mary’s widowed mother. They will claim $4,500 (2*$2,000 + $500 = $4,500). 

Step 4: This step is optional if you want to claim extra withholdings. 

• 4(a) applies to other income (not from jobs) that you expect to receive e.g. interest, dividends, and retirement income. You can enter the income amount. 

• 4(b) applies if you are NOT expecting to claim standard deductions. On page 3, there’s a section called “Step 4(b) – Deductions Worksheet.” You can follow the instructions and enter the results back on Step 4(b) on Page 1. If you’re unsure about your claims, most likely you will claim standard deductions. Otherwise, you should speak to your accountant or review last year’s taxes as your guide.

• 4(c)  should have been completed back in Step 2(b). If not, go to Page 3 section “Step 2(b) – Multiple Jobs Worksheet” to calculate. 

Step 5: Sign and date—you’re done!

This form is more direct and increases the accuracy of the withholding system.

What is Tax Withholding Estimator and Why Is It Important?

The new and improved Tax Withholding Estimator is designed to target more accurately the refund you want by taking out the correct amount of federal income taxes from your pay and telling you how to effectively adjust your withholdings.

There’s a customized refund slider that allows you to choose the refund amount you prefer from a range of different refund amounts. The exact refund range is based on the tax information you’ve submitted. The estimator also gives you specific recommendations on how to fill out the redesigned W-4 based on your selected refund amount. 

This is important because it allows you to accurately withhold the amount that meets your preference: receiving a large refund at the end of the year or more money in your paycheck throughout the year. 

Other notable features are:

• It allows anyone who receives a bonus to indicate whether tax will be withheld.
• It shows how to consider pension income, Social Security benefits, and self-employment tax.

When to use the Tax Withholding Estimator

• You had a major life change: marriage, separation, birth of child, adoption, or purchased a new home.
• If you’re filling out a W-4 to adjust withholdings.
• If you want to perform a Paycheck Checkup for good tax hygiene.

How to Use IRS New Tax Withholding Estimator

The Tax Withholding Estimator has clear instructions and a user-friendly design to guide you through the process.

It is broken-down into 6 sections with the following questions, including but not limited to:

1. About You
   1. Filing status
   2. Number of dependents 
   3. Total number of jobs held 
2. Income & Withholding
   1. Estimated taxable income, wages, and bonuses
   2. Contributions to tax-deferred retirement, cafeteria, or other pre-tax plan
3. Adjustments
   1. Scholarships or fellowship grants received 
   2. Taxable pensions, military retirement, and unemployment compensation 
4. Deductions
   1. Indicate standard or estimate itemized deductions 
5. Tax Credits
   1. Earned income and child tax credit
   2. Child and dependent care credit 
6. Results

In order to get an estimate, you must complete each step.

For items that do not apply, you can mark them a “0” or proceed to the next question. 

Once the questionnaire form is complete, you will receive your results that you can print out.

Tax Withholding Rule of Thumb

It’s always beneficial to recheck your tax withholding, especially at the beginning of the year. Even a mid-year withholding change can have a significant impact on the following year. As a result, your withholding might be higher or lower than you expected. In the long run, receiving an unexpected tax bill can impact your retirement account or savings account balances.

Kindur is a New York based financial technology company dedicated to helping Baby Boomers feel prepared moving into retirement. We provide smart, automated advice to personalize your retirement strategy so you can manage your savings with confidence. Learn more at kindur.com

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