The IRS has revised its controversial draft of the 2020 Form W-4, Employee’s Withholding Allowance Certificate. When first released, the form faced controversy over:
- complexity; and
- privacy considerations.
Old Form W-4 Relied on Withholding Allowances
Until now, employees adjusted the amount of withholding from their paychecks by simply increasing or reducing the number of withholding allowances on Form W-4, Employees could also ask for additional amounts to be withheld.
These earlier Forms W-4 included worksheets for taxpayers to determine their withholding allowances. However, it’s debatable how many taxpayers actually used the worksheets instead of just estimating their withholding allowances. The Tax Cuts and Jobs Act eliminated the personal and dependency exemptions, rendering the withholding allowance approach obsolete, so the IRS had no choice but to come up with something different.
First Draft of New Form W-4 Was Complex
The first draft of the new Form W-4 required five steps to determine how much federal income tax to withhold from an employee’s paycheck. The first and last steps are simple: step 1 is for the employee’s personal information and filing status; and step 5 is the employee’s signature block. However, the middle steps are more complex.
Step 2 – Account for Multiple Jobs
Step 2 on draft Form W-4 provides three options for when a return may report wages from more than one job:
- use the IRS calculator to determine the correct amount of withholding;
- use Worksheet 1 in the instructions “for roughly accurate withholding”; or
- if there are only two jobs in the household—for example, if each spouse on a joint return has one job—simply check the box on line 2 of the Form W-4 for each job. However, this option is accurate only if both jobs have similar pay; otherwise, excess tax may be withheld.
Step 3 – Claim Dependents
Rather than asking for the number of allowances, as on the 2019 Form W-4, the draft 2020 Form W-4 requires a dollar amount for dependents:
- $2,000 for each qualifying child; and
- $500 for each dependent who is not a qualifying child.
Employees can also enter an estimated amount for other credits they expect to claim, such as an education tax credit or the foreign tax credit.
Step 4 – Other Adjustments (optional)
In addition to asking what, if any, additional amount the taxpayer wants withheld, Step 4 of the 2020 draft form asks for the following information.
Line 4a – Enter the amount of other income that is not subject to withholding, if the taxpayer wants tax withheld from that income. The taxpayer should not include income from other jobs, but may include interest, dividend, and retirement income.
Line 4b – An employee who wants to reduce withholding due to deductions other than the standard deduction should use Worksheet 2 in the instructions and enter the result on line 4b.
Line 4c – Enter any additional amount of tax the taxpayer wants withheld (equivalent to line 6 of the 2019 form).
Line 4d – Select if the taxpayer expects to have no tax liability for the year and claims exemption from withholding (similar to line 7 on the 2019 form).
Revised Draft Form—Privacy Concerns Acknowledged, Complexity Remains
The revised draft Form W-4 retains the five-step process of the original draft Form W-4. However, the revised draft form adds a caution about privacy concerns to step 2. The step-2 choices remain the same, but the new draft form cautions taxpayers to choose one of the first two options if they have privacy concerns.
In step 4, the new draft form eliminates line 4d, the option to claim exemption from withholding. Instead, the instructions direct exempt taxpayers to write “exempt from withholding” below line 4c.
One other significant change is to the Multiple Jobs Worksheet in the instructions (Worksheet 1 in the original instructions). It asks the taxpayer to include any additional amount the taxpayer wants withheld.
There are other minor changes to the draft Form W-4 instructions. For example, the tool named “calculator” in the original draft instructions is renamed “estimator” in the revised instructions. Similarly, Worksheets 1 and 2 in the original draft instructions are renamed “Deductions Worksheet” and “Multiple Jobs Worksheet.”
The remainder of the draft Form W-4 is essentially unchanged from the original draft.
The IRS does not anticipate further changes to the redesign beyond minor updates for inflation. So it looks like taxpayers will have to get used to more complexity in completing Form W-4.
By Robert Recchia, J.D., M.B.A., C.P.A.