The IRS recently released the updated Employees’ Withholding Certificate, better known as the W-4. This is the first major update to the form since 1987, at which time it was simplified to match the Tax Reform Act. Now, it has been updated to reflect changes to the federal tax code from the 2017 Tax Cuts and Jobs Act.
The new W-4 is intended to help people more accurately calculate tax withholdings. According to the IRS, the changes are also meant to increase the transparency of the withholding system. For employers and employees alike, the updated form may cause some confusion since it is missing sections most taxpayers are used to seeing.
View the new W-4.
The new W-4 now has only five steps. The IRS states that employees only have to complete steps one and five, but if they choose to fill out the additional steps their withholdings will be more accurate. If you skip steps 2-4, your withholdings will be computed based on your filing status’s standard deduction and tax rates, with no other adjustments made.
The five steps are as follows:
Step 1. Enter your personal information.
Step 2. Indicate if you have multiple jobs or if spouse works.
Step 3. Claim dependents.
Step 4. Make other adjustments including for:
(a): Investment and retirement income.
(b): Deductions other than the standard deduction.
(c): Any extra tax withholding per pay period.
Step 5. Sign
You may notice that there is no longer a section for allowances. This is because personal and dependency exemptions are no longer allowed by law. Your dependents may still be used for other tax benefits, however, such as the Child Tax Credit, so you still need to know who is and is not considered a dependent.
Another important change is that the new W-4 asks if you have multiple jobs. While you’ve always had to report all income, the old W-4 used worksheets to account for multiple income streams. This version makes it easier to include additional income and accurately adjust your withholdings. If you do have multiple jobs, you should use the same W-4 form for all jobs to make sure your withholdings are accurate.
Concerns about the new W-4
Unlike the previous W-4, the new form asks for information about multiple jobs. It also includes a section for additional forms of income, like investments and retirement income. For some, this is a privacy concern because it requires you to reveal financial information. Workers may want to keep their side work, and their overall financial situation private.
To account for this issue, you can use the Tax Withholding Estimator. The estimator will help you calculate the additional amount of taxes that should be withheld from your paycheck. Then you simply enter that amount, in the form of additional withholding, into section 4(c) of the new W-4 form.
Who has to use the new W-4?
The updated W-4 must be used by all new employees you hire. Current employees, however, do not need to submit a new form unless they want to adjust their withholdings. It’s important to know that employers can ask, but not require current employees to fill out a new W-4 using the updated form.
According to the IRS, if you ask current employees to fill out the new W-4 form you should let them know that it is not required. You should also inform them that if they don’t submit a new form, their withholdings will be calculated based on their previously submitted W-4.
How does it affect you?
Every company, regardless of industry, has to use the updated W-4 form. There are, however, some things all companies may want to consider as they implement the new form. For instance, many workers have never seen the new form, or have used the previous version for years. They may need more time to read through, and accurately complete the new version.
Some payroll systems have accounted for the new form and simplified the process to some degree. For instance, we’ve created a simple-to-use, self-service tool within our system. This tool walks employees through the new W-4 process and allows them the time they need to understand each step. If you don’t have a simplified process in place, and want to offer employees some guidance, you may direct them to the IRS’s frequently asked questions.
The material presented here is educational in nature and is not intended to be, nor should be relied upon, as legal or financial advice. Please consult with an attorney or financial professional for advice.