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Form W-4 Basics

As the IRS has recently released a new W-4, now is a great time to refresh your knowledge about what this form is used for and how tax reform has impacted it.
Filling out a W-4 requires following new instructions.

Form W-4, Employee’s Withholding Certificate, is used by employees to determine the amount of federal income tax an employer should withhold from workers’ pay. The 2020 Form W-4 has undergone significant changes to more closely align the withholding to the changes in the tax law passed in 2017, and withholding is no longer based on allowances. The new W-4 is effective Jan. 1, 2020. 

What is the Form W-4 and what is it used for?

Form W-4 is a four-page form comprised of the withholding certificate, worksheets, withholding tables, and instructions. The form enables an employee to indicate their withholding status (single, married filing jointly, and head of household), their sources of income, and the dependents they wish to claim to determine the amount of their tax credits.

Who needs to fill out a W-4 form?

 It should be completed by a new employee hired after Jan. 1, 2020. However, any employee who wants the most accurate amount withheld from their pay should complete the new W-4 and use the IRS Tax Withholding Estimator. Additionally, an employee should fill out a new W-4 if:

  • There's a change in filing status (e.g., an employee gets married or divorced, or becomes a head of household).
  • There's a change in the number of dependents for whom a child tax credit can be claimed.
  • A spouse enters or leaves the workforce.
  • An individual takes on a second job.

What if no W-4 form is filled out?

Employees hired after Jan. 1, 2020 who fail to provide a Form W-4 should be treated as a single filer with no other adjustments.

Does the W-4 Form have an impact on FICA taxes?

The withholding certificate has no impact on FICA taxes. The employer withholds the employee share of FICA based on the amount wages subject to this tax even if an employee is exempt from tax withholding.

Does a W-4 need to be filled out every year?

No. Employers should remind employees, before Dec. 1 each year, to submit a new W-4 if their personal withholding situation has or will change. Form W-4 should be retained along with other records of employment taxes for at least four years after filing.

2020 Form W-4 key changes

The 2020 W-4 features the most significant changes to the form in more than 30 years, with the primary difference being the removal of allowances.

The 2020 Form W-4 will enable employees to determine a more accurate calculation of their federal withholding.

There are five steps, with steps 1 and 5 unchanged. Step 1 asks for identifying information (name, address, Social Security number, and withholding status (single, married filing jointly, etc.), while step 5 is the employee’s signature.

Step 2 asks employees to account for money earned from other jobs and a spouse’s salary – new requests from previous forms.

Step 3 enables employees to claim dependents to determine specific tax credits they are eligible for.

Step 4, which is optional, asks for additional income not related to a job, such as interest and dividends. It is also the step where one has the option to enter extra withholding from their pay.

For more details on changes to the 2020 Form W-4, read this article.

What if employees can claim exemption from withholding?

If an employee wants to claim exemption from all income tax withholding, Form W-4 must be completed annually. Eligibility for exemption can be claimed if:

  • An employee had a right to a refund of all federal income taxes withheld, and
  • He or she expects to have no tax liability.

There are specific instructions on the 2020 Form W-4 as to where an individual should note that they are exempt.

Conclusion

Employers can offer employees the option of completing W-4s by paper or electronically. The IRS strongly encourages taxpayers to review their withholding situation using the IRS Tax Withholding Estimator to ensure withholding is not under- or over-withheld.

barbara weltman
Barbara Weltman is a tax and business attorney and the author of J.K. Lasser's Tax Deductions for Small Business as well as 25 other small business books.
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