Updated: Dec 15, 2020
The saga of starting a new job is full of mixed emotions. Your excitement is overwhelming until you witness a human resources representative drop-off the pile of new hire paperwork on your desk. Panic sets in.
Not only is the stack inches thick but you have all of thirty minutes to name your emergency contact, contemplate the media release form, write down, in the tiniest boxes known to man, your entire work history, and scramble through your phone to find the contact information for your references, yet again.
When you reach the end of the forms you feel accomplished and exhausted. And then you forget all about them. Forever.
Try to remember one packet you rushed to finish. Remember your Form W-4. This form determines the amount of tax your employer will withhold from your paycheck, which, in part, impacts how much money you take home.
Unless you started a new job in 2020, you filled out the previous version of the W-4. The updated form was introduced as a result of the Tax Cuts and Jobs Act (2017), which significantly changed tax rates at all income levels. The change impacted many people when they filed their 2018 tax returns. Many found that they owed money when historically they had always received a refund, or their refund was sharply reduced.
The W-4 used prior to 2020 determined your withholding based on the number of allowances you claimed. The more allowances, the less tax withheld.
The revamped version of Form W-4 does away with allowances and tries to pinpoint an exact dollar amount to be withheld from your paycheck. The 2020 version also attempts to simplify the process for employees who might hold multiple jobs or have self-employment income.
As many of us return to the workplace, consider reviewing your W-4, and make the necessary changes to the amount of tax withheld from your paycheck.
You should make changes to your withholding especially following significant life events like getting married, getting divorced, having a child, starting another job, working only part of the year, taking a pay cut, or getting a pay raise. You can even fiddle with your withholding throughout the year.
The best tool to help you determine your optimal withholding is The IRS Tax Withholding Estimator. The page advises that you gather your recent pay stubs and if married, your spouse’s recent pay stub. Know the amounts of additional income you may have – self-employment income, dividend and interest income, etc. Use whole numbers in the estimator, round-down for amounts of $0.49 and under and round-up for amounts of $0.50 and above.
The IRS app is really helpful and determines the anticipated amount you will owe or the amount of your refund based on your current situation. The strategy is to get this number as close to zero as possible. While a big refund can be a nice surprise come tax season, all you are really doing by having too much withheld is giving the government an interest-free loan on your hard-earned money.
Turn your nightmares of new hire paperwork into more money in your paycheck! Update that W-4 you haven’t laid your eyes on in years. While the form itself can be overwhelming, turn to the IRS withholding app and even ask a tax professional for help.