Happy New Year! With a new year comes new changes - maybe it is a new fitness plan, a new budget, or even a new job. Well you aren’t the only one making some changes in your life. Even the IRS is changing things up — they just debuted a new Form W-4 for the first time in nearly three decades.
Form W-4, the official name for the Employee’s Withholding Certificate, is a document employees fill out so their employers can determine how much federal income tax to deduct from their paychecks. This redesign was necessitated by the 2017 Tax Cuts and Jobs Act.
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?
One major shift is that Form W-4 doesn’t use allowances any more. Due to changes in law, currently you cannot claim personal exemptions or dependency exemptions. The new W-4 calculates withholdings by having you complete up to five steps. Everyone has to do steps 1 and 5, but completing steps 2, 3, and 4 will depend on each person’s situation.
If you have been with your current company for a long time you might not even remember filling out your W-4, so do you need to fill out a new one? People who start new jobs in 2020 are required to complete the new form. But if you haven’t made any changes to your employment since last year, then your boss will just keep doing what they’re doing — determining your withholding based on your most recent W-4.
But what happens if you make a mistake? Don’t worry, it happens to everyone! 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. Luckily, the IRS has a tax withholding estimator online to walk you through everything.
If you are worried about the new W-4, the IRS has a handy dandy FAQs page on their website to help clear things up for you. Still confused on how this change will affect you or your business? Give us a call today and we will be happy to help you out!