In 2020, the IRS redesigned Form W-4, removing W-4 allowances and personal tax exemptions. Before 2020, you could update your tax withholding percentage by adjusting the number of allowances.
If you start a new job, get married (or divorced), have a baby, or your household income changes for any reason, the amount you owe for taxes will also change. You should periodically adjust your W-4 to avoid unexpectedly owing money to the IRS. We’ll cover how Form W-4 has changed and what it means for you.
What was a W-4 allowance?
An allowance or personal tax exemption was used to reduce the amount of money you owe on your taxes. The number of allowances you took would tell your employer how much should be taken out of your paycheck for income taxes.
Rather than asking individuals to pay all their taxes at one time, the U.S. has a pay-as-you-go tax system. This means that anyone earning income must pay taxes throughout the year. When you start a new job, you fill out a Form W-4 that tells your employer how much income should come out of each paycheck for federal income tax.
Before 2020, you were entitled to one allowance for yourself and one for a spouse if you were married. The more allowances you claimed, the more money you would take home.
Conversely, fewer allowances meant less take-home pay. The redesign is intended to provide a more transparent and accurate way to calculate your tax liability.
What replaced W-4 allowances?
Allowances have been replaced by a 5-step process to how much money is withheld from your paychecks. This 5-step process uses your income, filing status, number of jobs (or your spouse’s job), and number of dependents to determine how much of your income will be withheld for federal and state taxes. The redesigned form should make it easier to match your tax liability to your withholding amount.
How to change your tax withholding percentage without W-4 allowances
Allowances are no longer used to calculate how much money is withheld from your paychecks, but Form W-4 still serves the same purpose. You shouldn’t have to complete a new form if you’ve had the same job and no significant life changes since the W-4 was redesigned in 2020. But you may want to contact your employer and double-check the information you provided to be 100% sure.
You may want to adjust your W-4 if you start a new job or become unemployed, start a side hustle, get married or divorced, or have a baby. If your spouse gets a new job or significant raise and you typically file jointly, this can impact on your taxes in the form of the marriage tax penalty depending on your joint income and state of residence. To find out if your tax return is subject to this penalty, read Marriage Tax Penalty: Who’s Subject To It?
How do I fill out my W-4 if I have two jobs?
Additional income from a second job, self-employment, or side hustle can increase your tax liability. If you work more than one job at the same time, you should complete Step 2 of Form W-4 to determine the amount to have withheld from your paycheck.
This calculation keeps you from withholding more money from your paychecks than necessary. There are three ways to calculate your withholding percentage when you work two or more jobs:
1. You can use the IRS Tax Withholding Estimator to calculate how much to withhold and figure out the additional amount you set aside – if any. The estimator will be the most accurate calculation.
2. Or you can use the IRS Worksheet to manually calculate your withholding percentage and the additional amount you should have withheld, if any. The worksheet will be slightly less accurate than the IRS Tax Withholding Estimator.
3. If you only have two jobs with similar pay, you can check the box in Step 2–C when you complete your W-4s for each job. Checking this box on both forms will indicate to your employers to cut your tax brackets and deductions in half when calculating the amount to withhold from your paycheck.
My spouse also works. Who should claim our allowances?
Allowances are no longer a factor when filling out your W-4. However, if you are married and filing a joint return, you will need to consider your spouse’s income when completing Form W-4. You and your spouse’s income determine your tax bracket and tax liability.
If both of you work, then you should use Step 2 to calculate how much of your income to withhold. Having two incomes on a single return will increase your tax liability. If you require extra withholdings to cover your tax bill – completing Step 2 will help you determine the additional amount to withhold.
If you and your spouse have similar pay – you will both check the box in Step 2 – C when completing your W-4s. Checking this box tells each employer to cut your tax brackets and deductions in half when calculating how much to deduct from your paychecks.
If you do not have a similar pay – use the IRS Tax Withholding Estimator or the IRS Worksheet to estimate your withholding amount. This will help you to calculate your estimated tax liability and if you should take extra withholdings to cover your tax bill.
W-4 allowance and tax withholding FAQs
Need more information? We’ve answered some common questions to help you better understand tax withholding and the new W-4!
What happened to W-4 allowances?
In 2020, allowances were replaced with a five-step process that helps you determine how much of your income should be set aside for taxes each pay period. The new W-4 makes it easier to determine your tax liability to the amount withheld for taxes.
Are allowances the same as dependents?
No, but they affected each other depending on the number of allowances you claimed. Claiming fewer allowances meant you received a larger tax refund, while more allowances meant you may have received a tax bill.
For example, if you claimed allowances on your W-4, less money would’ve been deducted from your paychecks for taxes. This, in turn, put more money back into your pocket to handle dependent care expenses throughout the year. Your number of allowances depended on your financial circumstances, filing status, and number of dependents.
How does tax withholding work?
Withholding allows you to set aside a portion of your income throughout the year to reduce your potential liability when tax time comes around. You can do this by completing Form W-4 and turning it over to your employer. They’ll do the hard work of deducting a small amount of your earnings from each paycheck.
Where can I find the new Form W-4?
You can view and download a copy of the new Form W-4 at the IRS website. Once you’ve completed your W-4, you should receive Form W-2 to file your taxes by January of the following year. File quickly with 100% accuracy using TaxSlayer – start now!
