This W-4 overview has been updated for the 2024 tax year. The only time that the IRS’s Form W-4 typically enters our stream of consciousness is when we reluctantly have to fill it out on the first day of a new job, with the hope of not screwing it up. Employers ask you to fill out Form W-4 at the beginning of your employment and then they use that information to determine how much income tax to withhold from your paycheck.
But, the real value of the W-4 Form is not for your employer, it’s for you. In this article, I’ll cover what IRS Form W-4 is, when to fill it out, the newly redesign W-4 in 2020, and how to use the form for your benefit.
What is IRS Form W-4?
The IRS has an apt description of what Form W-4 does and why it’s important:
Complete Form W-4 so that your employer can withhold the correct federal income tax from your pay. If too little is withheld, you will generally owe tax when you file your tax return and may owe a penalty. If too much is withheld, you will generally be due a refund. Complete a new Form W-4 when changes to your personal or financial situation would change the entries on the form.
Here’s the thing – changes to your personal or financial situation happen all of the time – but most of us typically only update our W-4 when we start a new job. The following are just a few changes that could justify updating your W-4:
- You get married or divorced.
- You and/or your spouse anticipate more income from adding another job, or less income from removing a job.
- You and/or your spouse encounter additional income from a non-job source.
- You forego the standard deduction and anticipate itemizing your taxes in a given year.
- You become eligible (or are no longer eligible) for the Child Tax Credit, Education Tax Credits, EITC, or other major tax credits.
And one of the best times to submit a new form to your employer is when you realize that you have paid too much or too little for a given year is when you complete your tax return.
The IRS’s New W-4 Form Launched in 2020
Prior to 2020, the W-4 Form prompted you to select a number of withholding tax allowances. These “allowances” represented personal exemptions, or the amount of income that you could deduct for yourself and dependents. However, personal exemptions were removed with the Tax Cuts & Jobs Act (tax reform that changed the tax code in the years starting in 2018), so the IRS decided to redesign a new W-4 form for use starting in 2020 (and beyond) with the goal of making it simpler, more transparent, and more accurate than the old form. And this is the first major update to Form W-4 since 1987.
With the new W-4, employees will no longer calculate tax allowances, and instead will calculate dollar amounts based on the employee’s expected filing status and standard deduction for the year. The new form also makes it easier for employees with more than one job (or separate income) to withhold the correct amount of tax.
The new W-4 form includes:
- A new marital status box for head of household
- A checkbox for optional higher withholding
- Full-year value of child, dependent, and other tax credits
- Full-year amount of other (non-wage) income
- Full-year amount of itemized deductions (over the standard deduction amount)
- Per-payroll additional amount to withhold
How to Fill out the New W-4 Form
The new form walks tax filers through 5 steps of completion, in order to capture all income sources and account for tax credits and deductions:
- Step 1: is for your personal information
- Step 2: is for households with multiple jobs
- Step 3: is used to claim tax credits for dependents
- Step 4: is for other adjustments (additional income such as interest and dividends, itemized deductions that exceed the standard deduction, and extra tax you want withheld)
- Step 5: is where you sign the form
At a minimum, you must complete steps 1 and 5. Steps 2, 3, & 4 are optional, but completing them will help ensure that your federal income tax withholding will more accurately match your tax liability. They represent those life changes that I mentioned earlier.
Additionally, the IRS offers a tax withholding estimator tool online, with instructions on how to fill out your W-4. Grab a recent pay stub and your most recent tax return to test it out. You can also view withholding tax tables (based on your tax bracket) to get a quick general sense of how much might be withheld. These tables won’t factor in any credits, deductions, or other changes that may apply to you.
Note: you are not required to have taxes on non-wage income withheld from your paycheck – and many employees may want to avoid disclosing separate income (self-employed or otherwise) to their employer (line 4a). Instead, you can pay quarterly estimated taxes using Form 1040-ES.
What is the Benefit of Updating your W-4?
To further expand on a point made earlier, the primary benefit in updating your W-4 is to have an accurate amount of income tax withheld from your paycheck. Ideally, the amount withheld should be approximately the amount of tax you will owe for that year. Doing so will avoid:
Having too little income deducted, as it could result in a large amount of taxes due with your tax return. If you owe a high amount, it could even result in a tax penalty. And depending on your cash flow situation, meeting those payments might be challenging.
Having too much income deducted, as it could result in over-payment throughout the year, and a large tax refund. A tax refund may seem like a bonus to many (I call this “Tax Refund Windfall Syndrome“), but a tax refund is essentially an interest-free loan that you are giving to the federal government, and it reduces your cash flow throughout the year. The average tax refund has typically been more than $3,100 per return in recent years.
Are You Required to Fill Out a New W-4 Form?
There is no requirement for employers to collect new W-4 Forms (for employees who previously submitted the old form), or for employees to submit the new W-4 Form. Submitting a new W-4 is optional, and strictly to your benefit as an employee to do so. If you do not submit a new form, your withholding will continue as is, based on your prior form submission.
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