Why your clients need a mid-year withholding checkup

It’s always a good idea for employees to check their withholding throughout the year. Changes in a client’s personal situation — marriage, divorce, a new baby, or a spouse’s return to work — can trigger a change in the client’s tax picture that calls for an upward or downward adjustment in the amount of withholding that’s needed to cover their final tax bill for the year. However, a tax withholding checkup is more important than ever this year, even if a client’s tax situation has not changed.

Since the passage of the 2017 Tax Cuts and Jobs Act, income tax withholding has been challenging for employees, employers, and the IRS. That law threw a number of monkey wrenches into the income tax withholding system, including changes in income tax rates, elimination or reduction of itemized deductions and, most notably, the disappearance of personal exemptions, the linchpin of the withholding calculations. And, despite the IRS’s efforts to jerry-rig an outdated withholding system, the results have not been stellar.

When they filed their 2018 tax returns in 2019, many employees discovered that the amounts withheld from their paychecks did not produce the tax refunds they were expecting or, worse yet, resulted in unexpected tax bills. Overall, the IRS estimates it sent about 113.4 million refund checks for 2018 to taxpayers in 2019 — down from more than 116 million sent the previous year before the new tax law took effect. And, chances are, this year’s filings of 2019 returns will be off the mark as well.

New-for-2020 Form W-4

At long last, the IRS released a new-for-2020 Form W-4. The form has been renamed the Employee’s Withholding Certificate, instead of the Employee’s Withholding Allowance Certificate, in acknowledgement of the fact that withholding is no longer pegged to allowances based on the personal exemption amount.

In conjunction with the new Form W-4, the IRS has created a new Publication 15-T, Income Tax Withholding Methods, that contains the tables needed to figure withholding. Serving as a supplement to the traditional Publication 15, Employer’s Tax Guide (Circular E), Publication 15-T for 2020 no longer includes withholding tables.

The revised form is mandatory for all new employees hired in 2020 and employees who want to adjust their withholding going forward. However, current employees with a Form W-4 on record are not required to complete the new 2020 Form W-4.

KEY POINT: Even if a new-for-2020 Form W-4 is not required, you may want to recommend that clients take another crack at the form — especially if their withholding was off the mark in the last couple of years. Publication 15-T contains tables for calculating withholding based on Form W-4 from 2019 or earlier years. However, those tables may not produce the most accurate results.

On the form

In the simplest case, an employee using the new Form W-4 will only need to enter personal information and filing status, and sign the bottom. Withholding from the employee’s gross wages will be based on the standard deduction and income tax rates for the employee’s filing status, with no other adjustments. Of course, taxes are rarely that simple. Therefore, the form includes entries and worksheets to account for multiple jobs, to reflect tax credits for dependents, and to make adjustments for other income. However, here again, the form and worksheets may not produce the most accurate results.

Moreover, the IRS acknowledges that some entries required on the 2020 form may raise privacy concerns for employees — in particular, sharing information about multiple jobs, a spouse’s earnings, or investment income with the employer.

Off the form

To address these concerns, the IRS directs employees off the form to the IRS’s online Tax Withholding Estimator. Based on an employee’s inputs, the estimator provides specific recommendations on how to fill out Form W-4.

Refund option

Despite the oft-repeated mantra that getting a tax refund is like making an interest-free loan to Uncle Sam, many employees still want that check in the mail come tax time. For those employees, the Tax Withholding Estimator features a customized refund slider that allows users to choose the refund amount they prefer from a range of different refund amounts. The exact refund range shown is customized based on the tax information entered by the employee.