It’s here. The draft of the new and “improved” Form W-4. I want to note before saying anything else that this is a DRAFT. Do not fill out this form and take it to your employer. They won’t have any idea what to do with it. This form will be finalized this year and available for use starting 2020. You can click here to take a peek at the form as it currently stands.
Like many other tax professionals, I see a number of issues with the proposed draft. A few of which I hit on a few weeks ago in my last blog. My biggest concern is still ease of use. If you are a single taxpayer with one W-2 income, the form will be easy. However, if you are single but have dependents or a second job, or if you’re married and have multiple incomes in your household, the form becomes much more difficult. This leaves a great deal of room for error, possibly leading to some expensive consequences down the road. The form has 5 Steps. Let’s go through them one by one.
Step 1 is pretty self-explanatory. It requires you to enter your identifying information and select a filing status. I don’t foresee very many people getting hung up just yet.
Step 2 is where the difficulty starts. This is where you will account for multiple jobs. As the form states, “the correct amount of withholding depends on income earned from all jobs in the household.” So, it is important to make sure you’re accounting for all of yours and your spouse’s income if that’s applicable to your situation. This step asks you to choose one of three options to calculate proper withholding and each involves a tradeoff between accuracy, privacy, and ease of use.
1-- Use the withholding calculator on the IRS website where you will be guided through a series of questions regarding your current year income and deductions. I want to note that if you’re starting a new job, you may not know the information to properly answer the questions which will force you to estimate. This could easily lead to improper withholding. Though, using this option would provide you the most accuracy (if you know the correct answers) and privacy (to avoid revealing to your employer that you have multiple jobs).
2-- Use Worksheet 1 which is included with the form to be guided similar to the online withholding calculator. It reads something like a choose-your-own-adventure book from the 90’s. You’ll need to use the provided table to find the highest paying job and the lowest paying job and find where they meet on the table. If you have more than 2 jobs then you’ll essentially do this step twice and then add the figures together to determine your withholding. You’ll also need to know how many pay periods you have during the year. Hopefully all of your jobs have the same pay schedule. If not, the calculation will be off. Other things to note, if you don’t know the amounts you will be paid for each of your jobs over the course of the year, your withholding won’t be accurate. Also, if the pay changes for any of the jobs in the calculation (like if you get a raise) then you will have to furnish a brand new W-4.
3-- You can check a box stating that there are only 2 jobs in your household. The catch is that this would reveal to your employer that you have multiple jobs in your household and if the jobs aren’t similar in earnings then you could be withholding too much leaving you less money throughout the year. It’s also the easiest option. Therein lies my worry. When starting a new job, there is a TON of paperwork to be filled out. Would you just check the box and save yourself the difficulty of having to be more precise? I might if I didn’t know better.
If you manage to get to Step 3 without losing your mind, the good news is that it only applies if you have dependents. No kids or other dependent people? You get to skip to Step 4. If that’s not the case, it’s a matter of some simple multiplication. Just don’t count someone as a dependent if they don’t qualify because then you won’t be withholding enough. Not sure of the rules? Stay tuned for a blog about this one later.
Step 4 is where you’ll make adjustments for any other income or deductions you may have. Do you receive dividends? Planning to sell some stocks or a rental property? Do you have student loan interest? What about a side hustle? Do you sell Tupperware (yes, that’s still a thing)? If you are Self Employed in addition to being a wage earner, you’ll enter your income here. Not sure what it is? You have to guess and hope that its correct to ensure your withholding is proper. If you don’t want to enter any information in Step 4, that’s fine. BUT, that means you’ll need to make Estimated Tax Payments throughout the year to make sure you’ve paid enough by the time tax season rolls around or you could be subject to a penalty.
Step 5 is just for your signature. The form cannot be submitted without it so be sure you don’t miss it.
So, if you’re as concerned about your withholding as I am (and you should be) then be sure to review the form yourself and submit a comment. You can and should email your thoughts and/or suggestions to the IRS at WI.W4.Comments@IRS.gov by July 1, 2019. These draft forms are released to the public for this reason. The IRS wants to know what everyone thinks before they make these major changes and they really do listen!
If you’re an employer or a payroll processor, draft employer instructions for this form will be released soon. I’ll be sure to post when this happens so you can review it if you so choose.