SIOUX FALLS, S.D. (KELO) — Every time you started a new job, or for some reason had to update your W-4, for many there used to be a game of how many allowances to write down? People often searched Google for “should I claim one or two on my W-4?”
Those days are gone, as the Internal Revenue Service has updated the withholding form for 2020, and your employer should have the new version ready for you.
The W-4 is often filled out when people start a new job, during big life changes (marriage, kids, buying a house, pay cuts or raises) and tax experts recommend doing yearly.
This form determines how much your employer should pull out of your paycheck for taxes.
If they pull too little, you owe taxes. If they pull too much, you get a refund during tax season.
The five-steps are designed to clear up confusion, give smaller refunds and increase take-home pay.
The biggest change: there are no more allowances on this new form. That means you don’t need to calculate the magic number to put on the form. Instead, it uses real-dollar amounts and real-world information.
Many people with one job and no extra deductions or credits will only have to fill out steps one and five.
Steps 2-4 allow taxpayers to enter the number of children and deductions. The form automatically calculated for the standard deduction (about 70% of taxpayers choose this). Taxpayers who itemize will need to calculate their deduction.
Some people will put in any other deductions like student loan interest payments, the Child Tax Credit or retirement contributions.
Finally, the taxpayer will enter any additional income (outside of a job) and any additional amount they want to be withheld from each paycheck.
Tax companies like H&R Block have put together guides to help people work through the differences.
Are you paying to file your taxes? Seven in ten South Dakotans are eligible for the IRS Free File program, but KELOAND News found very little took advantage of the program.
Why it matters
For years the W-4 was a source of confusion, leading to giant refunds or none at all. Many personal finance experts, including Dave Ramsey, believe it’s better to get a $0 refund vs. a massive windfall in the spring.
This form is designed to help taxpayers do just that. Rather than using the allowances, it is calculated using your income and the standard deduction.
The average refund in 2019 was $2,725.
“So, let’s say you got paid every two weeks and received the average refund,” Ramsey said. “That means you should’ve had an extra $105 in every paycheck last year. Think of what you could do with $200 or more each month.”
Ramsey and other experts’ believe you could be earning interest on that money, instead of storing it with the federal government. Basically it’s giving the federal government an interest-free loan.
The flip-side is true too. Filling out the form wrong, by putting in an incorrect allowance, could end up for a big tax bill in the spring and even penalties.
“(The form) replaces complicated worksheets with more straightforward questions that make accurate withholding easier for employees,” the IRS said in a statement.
The IRS said this also helps employers.
“(The new W-4) reflects important feedback from the payroll community and others in the tax community,” said IRS Commissioner Chuck Rettig. “The primary goals of the new design are to provide simplicity, accuracy and privacy for employees while minimizing burden for employers and payroll processors.”
What you need to do
You don’t have to update with the new W-4, but it is recommended. If you do nothing, your employer will continue to follow your previous W-4.
If you do want to update, follow these steps:
- The IRS recommends first using the Tax Withholding Estimator, especially for those married or with two or more jobs.
- Talk to your employer about updating your W-4 for 2020. It’s better to do this earlier in the year, so the changes are made in time for 2021’s tax season. Many employers have the form built into their human resources software, so it could be just clicking through to make the updates.
- Decide what sections to fill out. Taxpayers are only required to fill out steps one and five. This will automatically be calculated using the standard deduction vs. itemized deduction. Most people now choose the standard following President Donald Trump’s tax cuts.
- The standard deduction for married filing jointly is $24,800
- For single taxpayers and married individuals filing separately, the standard deduction is $12,400
- Heads of households standard deduction is $18,650
- Think about your side jobs. Do you drive Uber in addition to your main job? They don’t withhold taxes, so you may want to add a little extra to be withheld on the form.
- Have kids? Pay interest on student loans? There are several reasons to look at steps two-four and you’ll need to fill these out.
Don’t like the idea of reducing your refund? The IRS’ estimator was also recently updated to allow people to decide whether you want a larger refund during tax season or more money on each paycheck. Choosing to go with a bigger refund, with the estimator, will give you the correct numbers to enter on the W-4.
The American Payroll Association recommends employers to notify employees of the changes since they are are so different, and even put together a sample letter.