How the Form W-4 Can Impact Your Tax Refund
For the first time in three decades, 2020 saw a set of critical changes made to improve the W-4 form. The IRS overhauled the process for determining how much federal income is withheld from an employee’s paycheck. So, what do these improvements mean for your business? Here are 3 things every worker needs to know about the new W-4 Form to avoid any unexpected surprises.
Employees No Longer Fill Out Allowances, Companies Do
In 2020, the most noticeable update to the W-4 Form was the removal of the allowance worksheet. This section had previously instructed employees to indicate their number of dependents, planned deductions, expected filing status, and more. Further, employees were guided on how to take these figures and calculate them into the final amount of withholding.
Now, employees will no longer have to claim allowances themselves. Instead, workers will use the W-4 form to provide their employer with the information needed to determine the specific amount of income tax to withhold. An employee will need to include things like expected filing status, number of dependents, family income from other jobs, and tax deductions you plan to claim. Once completed, your employer will forward the information over to your company to perform the calculations and implement the resultant deductions. In the end, the results should be the same. However, the downside is that it puts the onus on a company’s accounting department to complete every workers withholding allowances.
Some Employees Will Scramble to Fill Out New Forms, But Most Won’t Have to
Given that new information, your business’s accounting department may stress that they will have an influx of new W-4 forms filled out by employees who want to redo their withholding based on this adjusted form. All employees will undoubtedly have the ability to do this, so you should be ready for potential requests. However, there is no requirement for businesses to get a new updated W-4 form from their employees. Given that doing so would be an extra burden on the employee and, ideally, the updated form will still result in the same withholding that they already have on the books, most employees won’t be rushing to update their form.
The noticeable adjustment for businesses will be that new employees moving forward will fill out a new version of the W-4. Still, existing employees can (and likely will) allow their current withholding to stay if they are happy with it.
Adjusted Figures to Come, But Businesses Shouldn’t Sweat it
For the employee, another major update to the W-4 form is the ability to consider side jobs, freelancing, or other forms of income they expect to make during the year. Employees can now ask their employer to withhold additional taxes to cover the added income streams’ anticipated tax burden. The previous W-4 form did not allow for this, but in this era of the gig economy, the additional consideration will be a welcome addition for some employees.
Businesses should expect to see changes in how much withholding various employees request to account for this offering. These adjustments will not impact the business’s tax burden, so it’s not a consideration the business should worry about.
We’re Ready to Help You Begin Your Financial Journey
Changes to the tax code can be an anxiety-inducing measure, so businesses should continually stay updated on new changes. If you’re unsure how specific W-4 changes will impact your business, the trusted financial advisors at Tobin & Collins are here to help. Reach out to us today!