No doubt, employed taxpayers were and are upset about the changes to their paychecks over the past few years. The Tax Cuts and Jobs Act (TCJA) has changed numerous nuances about federal withholdings from American’s paychecks. Most would argue that the changes have been unfavorable, as quite a few Americans saw sharp drops in their tax refunds in the past tax season.
Completing a Paycheck Checkup
The IRS has been urging taxpayers for just about two full years now to spend some time going to IRS.gov and performing a Paycheck Checkup.
The Paycheck Checkup tool is a digital web-based tool created and maintained by the IRS that asks questions about your filing and martial status, you and your spouse’s wages, current withholdings, and more. At the completion of the quiz, the website does some calculations and tells a taxpayer how many allowances they should have listed on their Form W-4 and what they can expect to receive back as a refund if they list this number of allowances.
Then, it is up to the taxpayer to go to their employer or payroll provider and update their Form W-4 to match the new allowances number.
The glaring issue with this process: The Tax Cuts and Jobs Act (TCJA) eliminated personal allowances, often referred to as exemptions, essentially meaning that the Form W-4, the Paycheck Checkup calculator, and the TCJA do not work together.
The Current Form W-4 & Your Paycheck
The Form W-4, which employed Americans use to tell their employers how much to withhold in Federal Income Tax from their paychecks, has remained relatively the same over the past ten or so years. It is a small, simple half-sheet form that asks for a taxpayer’s name and address, and a number of allowances you’d like to claim. The employee signs the piece of paper, and the employer (or the employer’s payroll provider) enters the number of allowances into the company’s payroll system for it to automatically calculate the correct amount of tax to withhold from that specific employee’s paycheck.
Seems simple, right? Even in a tax code that is so incredibly convoluted, this process has remained relatively simple.
The New (Draft) Form W-4 & Your Paycheck
At the beginning of June, the IRS released its 2020 draft version of the Form W-4, and professionals immediately noticed it is completely revamped to match the new regulations of the TCJA. Gone are the days of a simple half-sheet asking essentially for just your number of allowances you’d like to claim.
The form is now a full sheet, and still asks for the same basic information the previous version did, but made a whole bunch of other information necessary as well:
- If a taxpayer has multiple jobs or if they are married and both spouses work, they must fill out lengthy worksheets to figure out the correct amount of withholding according to their total household income.
- Dependents (aka children) are now inquired about on the Form W-4, and dollar amounts of deductions for dependents must now be assigned.
- Other income as predicted for the upcoming year’s tax return is also inquired about. This includes interest, dividends, and retirement income that is not considered wages.
- A taxpayer’s deduction preference (standard vs. itemized) is also inquired upon. If they itemize, they are now asked to enter your predicted dollar amount of itemized deductions on the Form W-4.
In short, the new Form W-4 no longer uses the concept of withholding allowances, or exemptions, to determine what your estimated withholding will be from taxpayers’ paychecks. It instead asks you to assign some specific dollar amounts and asks other specific questions about life situations, instead of a more generalized approach.
For a side-by-side comparison, view the current Form W-4 on the IRS website here. Then, view the proposed 2020 draft of the Form W-4 here.
Let Boundless handle the countless number of payroll and tax regulation changes. We offer a wide range of services to individuals and small businesses to ensure you are ready for these changes. If you are an individual, we can assist you with a Paycheck Checkup to ensure your current withholdings are correct. If you are a small business, we have tax and payroll experts who can make sure your business hits the ground running in 2020 with this new Form W-4. Either way, contact us today!