In 2020, the IRS redesigned Form W-4, removing W-4 allowances and personal tax exemptions. Previously, you could update your tax withholding by adjusting the number of allowances. However, the IRS redesign of Form W-4 uses information like your household income, filing status, dependents, and anticipated credits and deductions to calculate your withholdings. The updated W-4 form enables you to more accurately estimate your total income and how much your employer should withhold.
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. It’s important to periodically adjust your W-4 to reflect your current situation and avoid unexpectedly owing money to the IRS. We’ll cover how Form W-4 has changed and what it means for you.
What was an allowance on Form W-4?
An allowance or personal tax exemption was used to calculate the amount of money you are expected to owe on your taxes. When you start a new job, and fill out a Form W-4 , it lets your employer know how much income should come out of each paycheck for federal income tax. The number of allowances you took would be used to calculate the amount of withholdings for each pay period.
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 of Form W-4 is intended to provide a more transparent and accurate way to calculate your tax liability. This change enables taxpayers to provide clearer information about their income and life changes, reducing the likelihood of under- or over-withholding.
What replaced W-4 allowances?
Allowances have been replaced by a 5-step process to calculate how much money is withheld from your paychecks.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 can adjust your W-4 by providing your employer with an updated Form-W-4.
If you start a new job or become unemployed, start a side hustle, get married or divorced, or have a baby, you may want to adjust your W-4 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.
Determining your withholding if your spouse works
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.
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:
- 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.
- 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.
- 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.
What happens if too little federal income tax is withheld?
When it comes to federal income tax withholding, striking the right balance is important. The IRS requires individuals to pay taxes on their income throughout the year, and if you haven’t withheld enough, it could result in tax liability. If too little tax is withheld from your paycheck, you might have a tax bill at the end of the year when it’s time to file.
You could even incur a penalty for underpayment of taxes. The IRS expects you to meet certain thresholds of tax payments throughout the year, and failing to do so can lead to added penalties. An underpayment penalty is typically assessed if you owe more than a specific amount ($1,000 for most filers) when you file your tax return. So, it’s essential to regularly review your withholding and adjust it as necessary, especially if you anticipate changes in income sources or tax deductions.
On the other hand, withholding too much can also have repercussions. While you may enjoy a larger tax refund when you file your taxes, over-withholding means you’ve essentially had your money in an interest-free escrow account. This isn’t ideal because it’s money that you could have used for investments, savings, or paying down debt throughout the year. Getting a significant refund could be a sign that you need to adjust your withholdings to have more money in your paycheck during the year.
How to claim an exemption from withholding
There are some circumstances where individuals may qualify for an exemption from federal income tax withholding, if they meet specific criteria. To be exempt, you typically must have had no tax liability in the previous year and expect to have none in the current year. This situation usually applies to students or individuals with minimal income.
To claim an exemption, you must complete the IRS Form W-4 when you start a job or adjust your withholding for your current job. On the form, you will be able to indicate your exemption status. Keep in mind, if your circumstances change during the year and you no longer qualify for the exemption, you’ll need to submit a new W-4 form to indicate that you are no longer eligible for the exemption.
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!
