There is a new Form W-4 for 2020. We recommend that everyone complete a new one now.
First, what is the difference between a W-2 and a W-4?
Lots of taxpayers get confused about these two forms.
- A W-2 is a report compiled by your employer in January, that details your earnings and all tax withholdings for the entire previous tax year. Your employer will mail this to you by January 31st each year. You use your W-2 to file your tax return with the IRS.
- A W-4 is a form that must be completed by you, through your employer when you first begin working at a new job or if your tax situation changes. This form tells your employer how much tax to withhold from your paycheck each pay period, based on the information you complete on the form.
- If you are currently employed, you probably have one on file. Form W-4 only needs to be updated if you need to adjust your withholdings at your existing job, if you start a new job, or have a life style change.
So, why are we talking about W-4s now?
Well, Form W-4 had not been updated in about three decades; that is, until about two years ago. When the Tax Cuts and Jobs Act was passed, personal exemptions were eliminated, and instead, the standard deduction and child tax credit increased. These changes to the tax laws can mean that your withholding needs have changed. Many taxpayers were surprised with an unexpected tax bill last year because they did not change their W-4 to reflect the changes. That’s why we recommend that everyone completes a new W-4 this year!
What would normally cause you to need to update your W-4?
A big change in your lifestyle such as getting married, divorced, having a baby, or income increase or decrease can mean it’s time to update your W-4. But, you can complete a new W-4 anytime you want. It’s not a bad idea to check it periodically. Just ask your employer!
What happens if you don’t have the correct amount of tax withheld from your paycheck?
When you withhold the incorrect amount of tax from your paycheck, you may not be paying enough in taxes, which would mean you would owe the IRS at the end of that tax year. Or, you might be paying too much in taxes, and then the government gets to use that money interest-free, until you file your tax return and get a refund for the excess in taxes withheld that year. Some people like that idea…a big refund! But what could you have done with that extra money throughout the year, had it stayed in your pocket?
The best idea is to estimate as accurately as you can how much tax should be withheld each pay period. By completing the new W-4 form, you are doing that!
If you need help completing Form W-4 or need other tax assistance, contact one of our Peoples Tax professionals today! Call us at (804) 204-1040 or email us to schedule an appointment! We are available in person in our RVA tax prep offices, or you can meet with one of our RVA tax pros virtually!