If you are switching jobs, you'll soon find out that the W-4 form that every employee has to fill out in order to determine the amount of taxes that are withheld from each paycheck has changed. The Internal Revenue Service (IRS) says it has revised the form in order to increase its transparency and the accuracy of the payroll withholding system.
Luckily, if you're not changing jobs and have no reason to redo your W-4, you don't have to fill out a new one. Your employer can continue to use the one you have on file.
The new W-4 does not ask employees to indicate personal exemptions or dependency exemptions, which are no longer relevant. It does ask how many dependents you can claim. It also asks whether you wish to increase or decrease your withholding amount based on certain factors like a second job or your eligibility for itemized deductions.
The new version of Form W-4 is labeled 2021 in the upper right of the form and has been effective since December 2020.
- Your entries on Form W-4, the Employee’s Withholding Certificate, determines how much tax your employer will deduct from your paycheck.
- The more accurately you fill it out the less you will owe (or be owed) when you file your annual income taxes.
- The new W-4 form lets you adjust your withholding based on certain personal circumstances, like a second job.
The New Form W-4
The W-4 form had a complete makeover in 2020 and now has five sections instead of seven to fill out.
The way that you fill out Form W-4, Employee’s Withholding Certificate, determines how much tax your employer will withhold from your paycheck. Your employer sends the money it withholds from your paycheck to the Internal Revenue Service (IRS), along with your name and Social Security number.
Your withholding counts toward paying the annual income tax bill you calculate when you file your tax return for the year. That’s why a W-4 form asks for identifying information, such as your name, address, and Social Security number.
What Has Changed on Form W-4
The 2020 version of the W-4 form eliminates the option to claim personal allowances. Previously, a W-4 came with a Personal Allowances Worksheet to help you figure out how many allowances to claim. The more allowances you claimed, the less an employer would withhold from your paycheck; the fewer allowances you claimed, the more your employer would withhold.
Allowances were previously loosely tied to personal and dependent exemptions claimed on your tax form. (The standard deduction was doubled as a result of the TCJA while personal and dependent exemptions were eliminated.)
The new form asks you to record the number of dependents in your household, in Step 3.
It also asks you whether your circumstances warrant a larger or smaller amount of withholding. For the first time, it allows you to indicate whether you have income from a second job, or expect to have deductions that you will itemize in your tax return.
The Five Steps of the New W-4: A Summary
The new W-4 has five steps, including one that is optional.
Step 1: This is the usual personal information that identifies you and indicates whether you plan to file your taxes as a single person, a married person, or a head of household.
Step 2: This part is for people whose circumstances indicate that they should withhold more or less than the standard amount. A spouse's income, a second job, or freelance income are all factors that can be recorded here.
Step 3: This section is where you indicate the number of your children or other dependents.
Step 4: This optional section allows you to indicate other reasons to withhold more or less from your paycheck. Passive income from investments, for example, may increase your annual income and the amount of taxes you owe. Itemizing deductions may lower the amount of taxes you owe. These may be reasons to adjust your withholding on the W-4.
Step 5: Your signature.
Why You Might Want to Revise Your W-4
The new W-4, released in December 2020, was the first major revamp of the form since the Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017. That law made major changes to withholding for employees.
In fact, the W-4 revamp and the tax changes since the TCJA may be a reason to look again at the W-4 you filed back when you first came to your employer and see if you need to make changes.
You also have a good reason to revise your W-4 based on your recent tax returns, if you discovered that you owed a lot of money, or were owed a lot of money you overpaid.
It is also a good idea to update your W-4 any time you have a big life change—like the birth of a child, a marriage or divorce, or a new freelance job on the side.
The New Form W-4 In Depth
If you are single or are married to a spouse who doesn’t work, you don’t have dependents, you only have one job, and you aren’t claiming tax credits or deductions (other than the standard deduction), then filling out a W-4 is straightforward. All you have to do is fill in your name, address, Social Security number, and filing status, then sign and date the form.
If your tax situation is more complex, you will need to provide information on your dependents, your spouse’s earnings, your expected additional income, and any tax credits and deductions that you plan to claim.
Here’s a step-by-step look at how to complete the form.
Step 1: Provide Your Information
Provide your name, address, filing status, and Social Security number. Your employer needs your Social Security number so that when it sends the money it withheld from your paycheck to the IRS, the payment is appropriately applied toward your annual income tax bill.
After completing this step, single filers with a simple tax situation, as described above, only need to sign and date the form, and they are done.
Everyone else has to take a few more steps.
Say your tax situation is simple: You have one job, no spouse, no children, and you don't itemize deductions. Just fill out Step 1 and sign the form. You're done.
Step 2: Indicate Multiple Jobs or a Working Spouse
Proceed to step two if you have more than one job or your filing status is married filing jointly and your spouse works. If this applies to you, then you have three options, from which you can choose one:
Use the IRS’s online Tax Withholding Estimator and include the estimate in step four (explained below) when applicable.
Fill out the Multiple Jobs Worksheet, which is provided on page three of Form W-4, and enter the result in step 4(c), which is explained below.
The IRS advises that the worksheet should be completed by only one of a married couple, the one with the higher-paying job, to end up with the most accurate withholding.
When filling out the Multiple Jobs Worksheet, the first thing you will need to differentiate is whether you have two jobs (including both you and your spouse), or three, or more. If you and your spouse both have one job, then you’ll complete line 1 on the form. If you have two jobs and your spouse does not work, you will also complete line 1.
To accurately fill in line 1, you’ll need to use the graphs provided on page four of Form W-4. These graphs are separated out by filing status, so you’ll need to select the correct graph based on how you file your taxes. The left-hand column lists dollar amounts for the higher-earning spouse, and the top row lists dollar amounts for the lower-earning spouse.
For example, let’s look at a person who is married filing jointly. Assuming Spouse A makes $80,000 per year and Spouse B makes $50,000 per year, Spouse A would need to select $8,420 (the intersection of the $80,000–$99,999 row from the left-hand column and the $50,000–$59,999 column from the top row) to fill in line 1 on the Multiple Jobs Worksheet.
If you have three or more jobs combined, between yourself and your spouse, then you will need to fill out the second part of the Multiple Jobs Worksheet. First, select your highest-paying job and second-highest-paying job. Use the graphs on page 4 to figure the amount to add to line 2a on page 3. This step is the same as the example above, except you’re using the second-highest-paying job as the “lower paying job.”
Next, you’ll need to add the wages from your two highest-paying jobs together. Use that figure for the “higher paying job” on the graph from page 4, while using the wages from the third job as the “lower paying job.” Enter the amount from the graph to line 2b on page 3, and add lines 2a and 2b together to complete 2c.
For example, let’s assume Spouse A has two jobs making $50,000 and $15,000, while Spouse B has a job making $40,000. Spouse A would enter $3,570 on line 2a (the intersection of the $50,000–$59,999 row from the left-hand column and the $40,000–$49,999 column from the top row). Adding $50,000 and $40,000 together for a total of $90,000, Spouse A would enter $3,260 on line 2c (the intersection of the $80,000–$99,999 row from the left-hand column and the $10,000–$19,999 column from the top row). Adding these two amounts together results in $6,830 for line 2c.
You’ll need to enter the number of pay periods in a year at the highest-paying job on line 3 of the Multiple Jobs Worksheet—for example, 12 for monthly, 26 for biweekly, or 52 for weekly. Divide the annual amount on line 1 (for two jobs) or line 2c (for three or more jobs) by the number of pay periods. Enter this figure on line 4 of the Multiple Jobs Worksheet and line 4c of the Form W-4.
Check the box in option C if there are only two jobs total for the two of you, and do the same on the W-4 for the other job. Choosing this option makes sense if both earn about the same. Otherwise, more tax may be withheld than necessary.
Step 3: Add Dependents
If you have dependents, fill out step three to determine your eligibility for the Child Tax Credit and credit for other dependents. Single taxpayers who make less than $200,000, or those married filing jointly who make less than $400,000, are eligible for the Child Tax Credit.
Technically, the IRS definition of a dependent is pretty convoluted (see IRS Publication 501 for details), but the short answer is that a dependent is a qualifying child or a qualifying relative who lives with you and who is supported by you financially.
Multiply the number of qualifying children under age 17 by $2,000 and the number of other dependents by $500. Add the dollar sum of the two to line 3.
The 2021 Child Tax Credit and Advance Child Tax Credit Payments are not taxable and therefore are not relevant to the information on your W-4 form.
Step 4: Add Other Adjustments
In this section, the IRS asks if you want an additional amount withheld from your paycheck.
“Of course not,” you say. “You’re taking enough of my money already.”
But the information you’ve provided in the previous sections might result in your employer withholding too little tax over the course of the year. That could land you with a big tax bill and possibly underpayment penalties and interest in April.
In that case, tell your employer to withhold extra money from each paycheck so that it doesn’t happen.
How do you know if this might happen? One likely cause is if you receive significant income reported on Form 1099, which is used for interest, dividends, or self-employment income that you have not yet paid taxes on. Or you may be still working but receiving pension benefits from a previous job or Social Security retirement benefits.
Step four of a W-4 allows you to have additional amounts withheld by filling out one or more of the following three sections:
If you expect to earn “non-job” income not subject to withholding, such as income from dividends or retirement accounts, enter the amount in this section.
Fill out this section if you expect to itemize your deductions and want to reduce your withholding. To estimate your 2020 deductions, use the Deductions Worksheet provided on page three of the W-4 form.
This section allows you to have any additional tax you want withheld from your pay each pay period—including any amounts from the Multiple Jobs Worksheet, as described above, if this applies to you.
Step 5: Sign and Date W-4 Form
The form isn't valid until you sign it.
In general, your employer will not send Form W-4 to the IRS. After using it to determine your withholding, the company will file it.
You only have to fill out the new W-4 form if you start a new job or if you want to make changes to the amount withheld from your pay.
You can change your withholding at any time by submitting a new W-4 to your employer.
Special Considerations When Filing Form W-4
If you start a job in the middle of the year and were not employed earlier that year, here’s a tax wrinkle that can save you money: If you will be employed no more than 245 days for the year, request in writing that your employer use the part-year method to compute your withholding.
The standard withholding formula assumes full-year employment, so without using the part-year method, you’ll have too much withheld and you’ll have to wait until tax time to get the money back.
The Bottom Line
It’s important to fill out a W-4 form correctly because the IRS requires people to pay taxes on their income gradually throughout the year.
If you have too little tax withheld, you could owe a surprisingly large sum to the IRS in April, plus interest and penalties for underpaying your taxes during the year.
However, if you have too much tax withheld, your monthly budget will be tighter than it needs to be. Also, you’ll be giving the government an interest-free loan when you could be saving or investing that money. You won’t get your overpaid taxes back until the following year when you file your tax return and get a refund.
At that point, the money may feel like a windfall, and you might use it less wisely than you would have if it had come in gradually with each paycheck.