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Major Overhaul on New Form W-4

The IRS recently redesigned the Form W-4, retitled Employee's Withholding Certificate, which tells employers how much tax to withhold from the employee's paycheck. This is the first major redesign since 1987! The redesign reflects changes to the tax code from the Tax Cuts and Jobs Act. Their goal is that it "reduces the form's complexity and increases transparency and accuracy of the withholding system."

What Changed? The biggest change is the elimination of "allowances," which were used to reduce the withholding on paychecks based on the number of "exemptions"(people/dependents in the household). 

The new Form W-4 is presented on a single, full page, followed by instructions, worksheets and tables. In place of withholding allowances, the new W-4 includes a process with five possible steps for declaring additional income, so employees can adjust their withholding with varying levels of accuracy, privacy and ease of use.

Step 1. Enter personal information.

Step 2. Indicate multiple jobs or if spouse works.

Step 3. Claim dependents.

Step 4. Make other adjustments including for:

Step 4(a): Investment and retirement income.

Step 4(b): Deductions other than the standard deduction.

Step 4(c): Any extra tax withholding per pay period.

Step 5. Sign the form.

The IRS explained that:

The only two steps required for all employees are Step 1, where they enter personal information such as their name and filing status, and Step 5, where they sign the form.

If Steps 2, 3 or 4 apply to employees and they choose to provide that information, their withholding will more accurately match their tax liability if they complete them. Employees, however, can adjust their withholding in Step 4(c) without sharing additional information.

Employees who just want additional withholding should use 4(c).

The IRS is not requiring all employees to complete the revised form and has designed the withholding tables so that they will work with both the new and prior year forms. However, certain employees will be required to use the new form: those hired in or after 2021 and anyone who makes withholding changes.

The IRS has tools online to help you complete the new Form W-4 as well as FAQ.

If you would like assistance in completing a new Form W-4, please call our office for a consultation regarding the new rules on federal income tax withholding. We can assist you in taking the steps needed to comply.