Employers may wish to encourage their employees to review their federal income tax withholdings for 2020, so they do not end up with a negative “tax surprise” when they file their 2020 Form 1040 next Spring. A mid-year tax withholding review is especially important this year due to the confusion associated with the “brand new in Jan 2020” W-4 design (no “allowances,”) as well as the sheer number of people who have been receiving taxable unemployment benefits (both federal and state) this year due to the pandemic. I suspect that most unemployment benefit recipients have not had federal tax withheld on their benefits, due to the urgency/chaos of the pandemic benefits—-both federal and state unemployment benefits are taxable for federal income tax purposes, so employees who have been on unemployment should calculate possible increased federal income tax to withhold now through year-end to cover their tax on these benefits.
THE NEW W-4 FOR 2020—-RADICALLY DIFFERENT THAN PREVIOUS YEARS
AccuPay wrote 3 PayDay’s about the brand new W-4 design, since most employees who complete one are uncertain as to how to complete it. Since the tax law changed to eliminate deductions for “exemptions,” the new W-4 does not ask for the number of “allowances” (exemptions), which has been a primary focus of previous W-4 forms, for decades. The new W-4 also enables employees to adjust their withholding for significant child tax credits and educational tax credits—–previous W-4 forms have not asked for input on those common tax credits. Finally, the new W-4 is confusing for married couples who each have W-2 jobs.
One of our previous PayDay’s was a user-friendly “guide” to help employees accurately complete the new W-4——our late 2019 PayDay’s about the new W-4 forms can be found here, to include the “handy guide” for use by your employees.
IRS TAX WITHHOLDING ESTIMATOR—ONLINE FOR ANYBODY TO USE
The IRS is encouraging taxpayers to use their online calculator to determine if their 2020 federal income tax withholdings appear “in line” with their income level and dependent tax credits. A “cool” feature of the online IRS calculator is an opportunity to “select your refund or break even status” (estimated) by simply sliding a bar to “hit” where a taxpayer would like to be when they file their annual Form 1040. The calculator then instructs the employee on how to revise their 2020 W-4 now to withhold federal income tax consistent with their year-end objective.
If you use the online IRS calculator, it will ask you for the number of your “dependents”—–do not include yourself/spouse, but only children or others you support such as a parent. Later, the calculator will ask you about the number of children “under the age of 17 (as of 12/31/2020) you will claim on your Form 1040—-they are each worth $2,000 in federal tax savings, whereas other dependents, to include children who are 17 or older, save you $500 each in 2020 tax—–Employees who choose to adjust their withholdings by the child tax credit (and also the college/education tax credit), will generally increase their net pay per paycheck now and reduce their year-end tax refund (previous W-4 forms did not permit taxpayers to factor child tax credits into their withholdings). Every taxpayer who uses the IRS online calculator should review the summary of details you will find in the “results” section of the calculator.
WHAT YOU NEED TO HAVE READY WHEN USING THE ONLINE CALCULATOR
Taxpayers/employees who are using the online IRS calculator should have their year-to-date pay stub details, a copy of their last Form 1040 filed as a “reference point,” and a listing of any other estimated income they expect to receive during 2020 (ESPECIALLY UNEMPLOYMENT BENEFITS FROM BOTH FEDERAL AND STATE GOVERNMENTS.)
If a taxpayer wishes to change their projected tax outcome (refund, owe money, break even) for their Form 1040, the calculator will display how to revise the W-4 form to reach the outcome desired by the taxpayer. EMPLOYERS MAY WISH TO PROVIDE THIS PAYDAY TO THEIR EMPLOYEES AS A COURTESY TO HELP THEM REVIEW AND ADJUST THEIR WITHHOLDINGS. AccuPay needs any W-4 revision from our employer-clients so we can implement the employee’s new W-4 in your payroll system.