2020 W4 warning

[kathyc2]

They built something into the formulas that I just now caught.

One would assume that if someone had been claiming S0 on old W-4 and if they just check the single box on the 2020 W4 withholding would be the same, correct? Nope. They build in 2 "exemptions" into the tables for single and 3 "exemptions" for married if someone has the 2020 W4. So, for single, they would have 8600 times their top marginal rate LESS withheld.

They did put out an Excel sheet which shows this much better than I can explain it in words. https://www.irs.gov/businesses/small...-for-employers

[kkuch]

Can't thank you enough!! Was trying to figure this out and had no clue where to find or how to calculate

[Dusty2004]

Kathy: I just played with the spreadsheet and put in that they make $2,000 per week. It said to withhold $309. If I run those numbers in a 2019 tax return I show a small amount of a refund. What would have been the refund under the old system?

[rbynaker]

Thanks, Kathy.

This is just mostly my own ramblings to contribute to the discussion. Folks, if you don't like math, don't feel bad if your eyes start to glaze over on this stuff!

I looked at this when everything was still in Draft last year to try to make sense of what was going on. It took a lot of bouncing back and forth between the (then draft) W-4 and the (also draft) Pub 15-T (mostly Worksheet 1). My general confusion was compounded by the fact that the 15-T draft was still using the 2019 tax rate schedules. Once I figured that out I had my "Eureka" moment.

That said, if you spent much time with the "old" W-4, what I would call "normal", a single one-job 1040EZ person following the W-4 directions would come up with Single-2 for withholding status/allowances. Married would be Married-3.

That's the baseline for the "new" W4. If you do nothing you basically end up defaulting to S2 or M3. I'm sure they did this to be backwards compatible. I think the new system is not horrible. It's somewhat compatible with the old and new way of doing things (conceptually). It will have some unintended consequences, but I'm hoping that's where we come in, as tax professionals.

While I'd like to have a more comprehensive understanding and a better presentation of facts, I'm happy to share what I have with the caveat that it's a work in progress.

An obsolete "withholding allowance" for 2020 is valued at $4,300--Not-so-coincidentally the amount of income a QR dependent has to stay under, and what a personal exemption would have been worth had it not been reduced to $0 under TCJA. So with Single-2, that's $8,600. If you look at the rate schedules in 15-T (page 6, Standard), you'll see with annualized income of $0 - $3,800 the tax rate is 0%. That's because the tables use the $12,400 standard deduction. So $8,600 for our S-2 +$3,800 = $12,400. If you add this "phantom" $8,600 to every bracket, voila, you get the 2020 tax rate schedule. Same thing on the married schedule but $12,900 + $11,900 = $24,800 (MFJ SD).

Checking the 2(c) box on the W-4 moves you from the left-side rate schedules on 15-T page 6 to the right-side rate schedules. The right side assumes that you're "sharing" your standard deduction with another job (either your second job or your spouse's job). The brackets are based on half of a $12,400 SD (so $0 - $6,200 is taxed at 0%) and then the breaks are 50% of the rate schedule. The theory being that you'll do the same for your other job and when you add them together at the end of the year you'll be "right on schedule."

3+ jobs and the whole thing falls apart though. I don't know that I have a solution but the IRS website claims to. I haven't played with it yet though.

I think for most of my married folks (the vast majority of my clients are two-earner households), we're aiming for Married, check the box in 2(c) and do a mid-year check-up to make sure something hasn't gone off the rails. If they itemize it gets more complicated. My inclination is to spread the itemized deductions (in excess of the standard deduction) over his & hers W-4 forms in 4(b). Some folks get grumpy if they're making the same amount but one of them is having way more taken out in federal income tax. But this is really going to become an art rather than a science.

Moving on with concepts...

For salaried folks with other income (investments, etc.) or who are aiming for the 100%/110% of prior year W/H it's probably pretty safe and easy to use the 4(c) extra withholding which will mimic the extra withholding box from prior years. I used to like to do S-0+$x in prior years. For hourly folks or folks on commission with highly variable income, I'm really going to be looking more closely at the 4(a) and 4(b) adjustments since these are applied before hitting the tax brackets. Someone with a bad week and a 4(c) additional tax could literally have a $0 net paycheck because the 4(c) is going to kick in regardless of their income. With a 4(a) adjustment, the tax will "float" better with the income.

If you know how much you want withheld, you might try plugging in a billion dollars (or any amount higher than the client's income) for 4(b) and then the amount you want withheld in 4(c) to reach a fixed withholding amount.

Are we having fun yet?

Moral of the story: Things have changed. If this is an area you work with clients on, spend a couple hours with the W-4 form/instructions AND Pub 15-T so you have an idea of what to expect. In general, the new W-4 is going to attempt to hit $0 balance due and $0 refund. If your clients are using the IRS as a forced savings account to pay for that summer vacation next year, prepare them for disappointment (and/or adjust their W-4 to have more money taken out!)

Rick

[kathyc2]

Kathy: I just played with the spreadsheet and put in that they make $2,000 per week. It said to withhold $309. If I run those numbers in a 2019 tax return I show a small amount of a refund. What would have been the refund under the old system?

Change the drop down to before 2020 version. If S0 the withhold will be 349 a week. If S2 the withhold will be 309; same as if using the 2020 form.

You are calculating a small refund because you are using 2019 rates. If you use 2020 rates, the refund just gets to rounding error of $5.

[kathyc2]

Rick:

You are spot on with your calculations. I doubt many people want to put the time in or would be able to fully understand how it all works. In the past there was always a "cushion" built in so the simple one W2, no other income taxpayer was getting a refund.

You are correct that the new W4 does aim to have a break even. People are so conditioned to equating filing taxes with receiving a refund, I think a lot of people are going to be in for a rude awaking come 2021.

[AZUKHiker]

To keep things simple I am using the 2020 tax projection in my tax software to project the tax due. Then using the percentage method tables, page 6 in Pub 15-T, work out the withholding for the Standard Withholding (Box 2 not checked on W4). Difference between projected tax and withholding from Pub 15T gives additional withholding for Step 4c on W4. If necessary I will tweak for child tax credit but this will keep it simple for clients. Complete Step 1 and Step 4c of W4 only.

[kathyc2]

To keep things simple I am using the 2020 tax projection in my tax software to project the tax due. Then using the percentage method tables, page 6 in Pub 15-T, work out the withholding for the Standard Withholding (Box 2 not checked on W4). Difference between projected tax and withholding from Pub 15T gives additional withholding for Step 4c on W4. If necessary I will tweak for child tax credit but this will keep it simple for clients. Complete Step 1 and Step 4c of W4 only.

If you are using the left side tables on Page 6, you need to remember to add 8,600 for singles and 12,900 for married to wages before using table for calculations.
Example: person with single on W4, wages of 50,000. Use 58,600 before using formulas in table. That should give you annual withholding of 4,314.

[AZUKHiker]

The $12,900 or $8,600 is deducted from actual annual wages before going to the table on page 6. See steps 1g, 1h and 1i on page 5.

So for $50,000 of actual annual wages filing single the annual wages used for the table is $50,000-$8,600=$41,400. Per the tables withholding on that is $4,314 which is exactly the correct tax for $50,000 of actual wages.

[kathyc2]

Yep My bad. Brain dead after spending hours building a spreadsheet to account for the variables.

[ttbtaxes]

I just quickly did 2020 calculations with a pencil and adding machine so they may be wrong. I used the single Federal tax rates for 2020 and the standard deduction of $12,400, so someone with a salary of $2,000/week would have a W-2 of $104,000. The taxable income would be $91,600 ($104,000-$12,400).

The Federal tax on $91,600 would be $16,064. The withholding per the IRS Excel spreadsheet would be $304 x 52 weeks for a total of $15,808 withheld leaving a balance due of $256. Uh oh.

So, unless my calculations by hand are incorrect, if the client used the Excel spreadsheet and submitted the W-9, they would owe $256 for 2020. I plan on warning every client when I prepare their 2019 tax returns. Thanks for the heads up.

[Twin Turbo Z]

Seems the lower you are in a tax bracket the less they take out under the new w4. Hits more in the 12% bracket, but then again lower end of that bracket you wont owe anything Im just going to let clients know the issue and what the average % difference is. That way they can change it and if they dont, well, they will not get sticker shock next year.

[Jiggers]

In looking at the new W-4 and all the instructions, the IRS "assumes" that all taxpayers have a degree in "Income Tax" and prepare their own returns. So do you spend about 1/3 to 1/2 hour with the client just to help him/them prepare the W-4 and charge them?

[dtlee]

In looking at the new W-4 and all the instructions, the IRS "assumes" that all taxpayers have a degree in "Income Tax" and prepare their own returns. So do you spend about 1/3 to 1/2 hour with the client just to help him/them prepare the W-4 and charge them?

No. I do it for them in CFS W4 Calculator.