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Well, the momentous day has arrived. On February 28th, the IRS announced the release of the new Form W-4 and the hotly anticipated withholding calculator. Both the new W-4 and calculator will help your employees determine their 2018 tax withholding in the wake of the Tax Cuts and Jobs Act (TCJA). Or in other words, that new tax reform everyone’s been talking about.
In this post, we’ll provide a quick overview of the W-4 and calculator so you can help your employees if they need to make adjustments to their withholding amount. Why does this matter? Because employees who don’t revisit their withholding allowances and/or additional withholding amounts could end up with a surprise come next year—a large tax bill or a giant refund that they could’ve invested throughout the year.
Let’s dive into the details so you can help your team prevent either case from happening.
Good (W-4) Form.
Many employees who have not had significant life changes such as getting married or having kids have probably not filled out a W-4 in a LONG time. That’s why you should stress to your team the importance of reviewing their withholding. The TCJA contains major changes that can affect many taxpayers in many different ways.
Here’s what’s different in the new form:
1. The Personal Allowance Worksheet jumped around.
The first thing we’ll point out on the new W-4 is that the Personal Allowance Worksheet has moved to page three. This worksheet walks taxpayers through the number of allowances they will take, which determines how much tax is withheld from their paychecks.
2. More people will be eligible for the Child Tax Credit.
Another big change is the newly expanded Child Tax Credit (CTC). On the 2017 W-4 it was on Line G of the worksheet:
Here’s what it looks like now:
As you can see, there are several new income brackets for the CTC. This means that a number of taxpayers who have never qualified for the CTC before will now become eligible, so be sure that your employees with children revisit their W-4.
3. There are revised worksheets for Deductions and Adjustments and Two-Earners/Multiple Jobs.
Your employees who have had itemized deductions in the past or have significant non-wage income (this includes stuff like dividends, interest, or business income), should prepare the Deductions, Adjustments, and Additional Income Worksheet on page three.
Likewise, employees who have a second job or spouses who work will want to fill out the Two-Earners/Multiple Jobs Worksheet on page four.
Should my employees fill out a new W-4?
Here’s a list of questions your employees can ask themselves if they are wondering if they have to fill out a new W-4:
- Are you married? If yes, does your spouse work?
- Do you or your spouse have a second job?
- Do you have kids?
- Have you itemized deductions in the past?
- Do you have any non-wage income? If so, is it significant?
If your employee answers “Yes” to any of those questions, then they should revisit their W-4. Employees can also refer to the new W-4 Frequently Asked Questions published by the IRS, which provide further guidance on whether an employee should adjust their W-4 elections in 2018.
Enter, the new and improved withholding calculator.
Now, some of your employees might give you the side-eye when you suggest they fill out all those worksheets on the W-4. To make it easier on them, send over the IRS’s updated withholding calculator.
Anyone who wants to use the calculator will need to be prepared with similar information that’s requested on the W-4 worksheets. Luckily, the IRS has a hit list of the items taxpayers should have handy when they want to use it.
If you have employees interested in this approach, they should have:
- Their most recent pay stub. It should include the amount of federal income tax withheld so far in 2018.
- A completed copy of their 2017 (or most recent) tax return. It will help them estimate income and other items for 2018.
It’s important for you to explain that the withholding calculator will only be as accurate as the information your employees enter. If someone chooses to throw in their “best guess” for any of the requested information, they won’t get a precise result.
The withholding calculator will spit out an estimate of what someone’s tax liability will be for their 2018 return and whether their current withholding is enough to meet that obligation. Depending on your team’s situation, this information may cause them to make changes to their W-4.
In general, the IRS recommends that taxpayers with the following profiles check their withholding:
- Two-income families.
- People with two or more jobs at the same time or who only work for part of the year.
- People with children who claim credits such as the Child Tax Credit.
- People who itemized deductions in 2017.
- People with high incomes and more complex tax returns.
The bottom line: Less is more (literally).
As a general rule, the fewer withholding allowances you enter on Form W-4, the higher your tax withholding will be. Entering “0” or “1” on line five of the W-4 means more tax will be withheld. Put another way: More allowances mean less tax withholding, resulting in a smaller tax refund or potentially, a tax bill or penalty.
Finally, if you know that some of your employees will be filling out new W-4s, be sure they submit them to you (i.e., the employer) as soon as possible. They’ll want the adjustments to take effect earlier rather than later, so the right amount of taxes are withheld for a majority of the year.
The new Form W-4 doesn’t have to be annoying. Highlight the changes for your team and then give them the tools to pick the best possible withholding number—no regrets needed.
This article contains general information but is not intended to be construed as tax advice. Each business and situation is different, so please consult with a tax professional to help you make the right choices for your company.