Now is the perfect time to remind employees to complete an updated W-4 form for the new year. Employees who have experienced a “life-change” during 2024, such as marriage, divorce or a change in number of dependents, may also see significant changes in their tax bill. AccuPay’s Guide to Completing the W-4, first drafted five years ago, is still an excellent resource that may be shared with employees as they complete new W-4 forms for 2025. See our original post for more information about how and why the W-4 changed in 2020.
AN EASY WAY TO COMPLETE THE W-4 FOR MOST INDIVIDUALS
The new W-4 form has 5 steps in it, with supporting and “behind the scenes” tax calculations, BUT MOST EMPLOYEES can prepare and submit a reasonably accurate W-4 form by completing Steps 1, 3 and 5 only, as follows:
Step #1—-Complete name, social and IMPORTANTLY filing status as single, married filing a joint return or head of household (single person who maintains a household where kids/dependents live). The filing status in Step #1 is important since it calculates the correct standard deduction which is built into the IRS withholding tables—-least amount for “single”, most for “married” and in the middle for “head of household”
Step #3—-Enter the number of dependent children who will be less than 17 years of age as of 12/31 of current year——multiply by the child tax credit amount of $2,000 per child. Then enter the number of “other dependents” who are children 17 or over and others who you claim as dependents—-parents, nieces/nephews you support, foster children, etc—–TAX CREDITS REDUCE YOUR WITHHOLDING DOLLAR FOR DOLLAR IN THE TABLES.
Step #5—-Sign the bottom of the W-4 and submit it to your employer COMPLETING THE ABOVE 3 STEPS WILL CALCULATE YOUR WITHHOLDINGS BASED ON YOUR INCOME LEVEL, FILNG STATUS, CHILDREN/DEPENDENTS AND YOUR STANDARD DEDUCTION AMOUNT. YOU CAN IGNORE STEPS 2 and 4, WHICH GENERALLY DO NOT MATERIALLY IMPACT YOUR FEDERAL WITHHOLDINGS. COMPLETING YOUR W-4 IN THIS EASY WAY SHOULD ONLY TAKE 5 MINUTES!!
MORE COMPLEX TAX RETURNS
An employee who has a more complex tax fact pattern, or for those who simply “like” to work with taxes and like “precision,” can spend more time and carefully complete the new W-4. This could be important for high-income taxpayers, married couples who often owe more tax due to multiple jobs/W-2s, those with education credits, those who “itemize” their deductions with substantial mortgage interest or donations to charities, and similar fact patterns. These employees would complete their W-4 in the following “steps”:
Step # 1 is identical to the above.
Step #2–Step #2 recognizes that a common fact pattern in which employees owe more taxes when they file their 1040 forms at year-end is a married couple who each have significant W-2 earnings OR a single taxpayer who has multiple jobs (likely can ignore small W-2 wage amounts). Step #2 provides a “multiple jobs worksheet” on page 3 of the new W-4 in which multiple jobs can be “plotted” along the worksheet grid, and finding the “additional/extra” tax on the worksheet in which the highest and lowest paying jobs “intersect” on the worksheet. This amount from page 3 of the W-4 can be inserted in Step #4, column c, which when entered into the employer’s payroll system will withhold the extra amount ratably per paycheck.
Step #3 will provide an opportunity for a taxpayer to increase the line 3 federal tax credit amount for education and daycare tax credits—–those individuals are generally aware of the basics of the education and daycare tax credits and can refer to their previous year Form 1040 for their education tax credit on Form 8863 and their child/daycare credit on Form 2441——INCREASE your line 3 child/dependent credits by the amounts of anticipated education and daycare tax credits———CREDITS WILL REDUCE YOUR WITHHOLDING DOLLAR FOR DOLLAR WHEN ENTERED INTO THE WITHHOLDING TABLES
Step #4–Deductions—-Taxpayers with significant amounts of itemized deductions for mortgage interest and/or donations can enter their expected total itemized deductions from Schedule A, Form 1040, in excess of the standard deduction for their filing status, in Step #4, line 2——Also, those taxpayers who contribute to tax-deductible (not Roth) IRA’s and Health Savings Accounts can also enter those expected annual amounts in the figure on Step #4, line 2
Step #5 is identical to the above
Earned income credits and students who generally do not pay any tax
Employees who generally have zero federal income tax due to the “low income earned income tax credit” OR students with part-time jobs who do not earn enough to pay federal income tax, can enter “EXEMPT” on the W-4, next to line 4(d) and no federal income tax will be withheld from their wages. The rules to claim exempt status (no tax in previous year and none expected during the current year) remain unchanged from the previous W-4 form.
How is the 2020 W-4 Form different from previous years?
The 2020 W-4 form provides an opportunity for individuals to more accurately calculate their withholding based on their filing status, the opportunity to increase one’s withholding for married couples, opportunities to reduce an employee’s federal tax withholding based on child tax and dependent tax, education tax credits, and deductions in excess of the standard deduction.
The new W-4 is essentially a projection of an employee’s federal income tax liability, which revolves around one’s income level, deductions, and federal tax credits.
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.