What is Withholding?
Withholding is the amount taken from your paycheck to pay federal and state income taxes, and social security and Medicare taxes. From each pay check an amount is “withheld” and your employer turns it over to the Internal Revenue Service. When too little is withheld for federal and state income taxes, you will owe when you file your income tax return.
Many people owed tax in 2018 due to under withholding.
In December 2017, the Tax Cuts and Jobs Act took effect lowering the amount of annual tax paid for many tax payers. However, many taxpayers who filed their 2018 tax returns in 2019 discovered that they owed the IRS. The IRS changed the withholding tables in February 2018, and for many people too little was withheld. The result was that while most taxpayers paid less in annual income taxes, many owed the IRS because too little had been taken from their paycheck.
The IRS revamps withholding for 2020.
Without much media attention, the IRS has revamped the 2020 Form W4 and withholding tables. There are no more exemptions. Calculations for dependents are found in Step 3. The new calculations are designed to have exactly the correct amount withheld. If exactly the correct amount of tax is withheld, you are likely to receive no refund, a small refund, or owe.
What type of result do you want?
I’ve found in my years as a tax practitioner, that most people want a refund. They use the IRS as an enforced savings account. They absolutely do not want to owe, and most people are not happy when they get a small refund. If this sounds like you, then you should consider filling out a new W4 Form.
Fill out a new W4 form in January. To make sure your withholding is correct, you can fill out a new W4 form for your employer. The new form is not easy. It requires you to estimate other income, such as a second job, or alimony, and tell your employer about it, so the employer can correctly calculate how much to withhold. In my opinion, that is too much information to give to an employer. You must also correctly fill in how many children you will be claiming who will be under age 17 at the end of the year.
If you are like most people, take these steps.
First, gather your last pay stub from 2019 and your first pay stub from 2020. Compare the withholdings. If it is less, or really different, you may need to change your withholdings. If you want more withheld, you can check the box in Step 2c of Form W4. This will result in an additional $1,000 being withheld over the year (about $38 every two weeks) for a single person. If you are really concerned that not enough will be withheld, you can add an additional amount to be withheld on line 4c. An additional $75 every two weeks will result in an additional $1,950 being withheld over the year.
What if I need professional help to figure it out?
Call your tax professional and request a W4 check up. Bring your last pay stub of 2019 and your first pay stub of 2020, and last year’s tax return. Your tax professional should be able to calculate what the correct withholding should be and help you fill out the W4 to make sure that you have enough withheld, and receive the result you want in terms of a refund. If you don’t want to ask a tax professional, you can use the IRS withholding calculator.