2020 was a year of change. It included a global pandemic, record high unemployment and the United States presidential election, to name just a few of the major events that peppered the news. But one change may have slipped right under your nose unless you started a new job – the new W-4 form. The IRS updates the W-4, otherwise known as the Employee Withholding Certificate, every year and most people do not notice the minor tweaks on the form. However, a number of major changes were implemented in 2020 and carried over into 2021 that had employees shaking their heads in confusion. What are some of the standout alterations to the form?
Employees complete a W-4 upon hire to validate the amount of federal tax to collect per paycheck. In prior years, marital status and number of allowances were relied upon to determine an employee’s tax withholding. Congress passed the Tax Cuts and Jobs Act in 2017, which increased the standard deduction significantly (raising it to $12,000 for single filers and $24,000 for joint filers in 2018), making it more advantageous for many to take the standard deduction instead of itemizing. This change removed the need for allowances to be included on the W-4. It took a few years for Congress to design a new withholding system. As a result, 2020 was the first year where the number of allowances was not used to determine tax withholdings. One option is for employees to use the new marital status box to determine tax withholdings. Another option is to use one of the available tools to estimate withholdings with a higher degree of detail. This is useful for employees who are married, have dependents, or a new job. The IRS provides a number of options to calculate this estimate, including the IRS tax withholding calculator and the Multiple Jobs Worksheet. The tools and the new W-4 require withholdings to be entered in dollars for more accurate withholdings.
Employees are not required to complete a new W-4 every year but can file a new form at any time. There are a number of situations which should prompt you to revisit your W-4 elections; for example, if you have been at your current job for a while or if your 2020 tax return was surprising (either with a larger refund or payment than expected). Other good reasons to complete a new W-4 include adding a new job, a change in your marital status (single, married, or head of household), or a change in your dependents. It is a good practice to review your W-4 annually to ensure your finances are in tip-top shape.
SOURCE: United Benefit Advisors (UBA)