Page 32 - Tax Withholding Estimator FAQ's

W HY DOES THE TOOL RECOM M END ONLY ONE

AM OUNT TO ENTER ON FORM W -4?

- Form W-4 is used to adjust an employee?s income tax withholding up or down relative to the basic
amount, given the employee?s filing status and wage amount. Prior to 2020, employees could
decrease withholding by claiming an appropriate number of allowances, and they could increase
withholding by entering a specific additional amount to withhold from each paycheck.
- Those were the only two possible entries, and employees generally used either one or the other
(since those two lines worked in opposite directions). The Tax Cuts and Jobs Act of 2017
eliminated personal and dependent exemptions, and because withholding allowances were
equated with exemptions, it was best to move away from using withholding allowances.
- So, beginning in 2020, Form W-4 offers employees four ways to change their withholding: line 3
toreducethe amount oftaxwithheld; line 4(c) toincreasethe amount oftaxwithheld; line 4(a)
toincreasethe amount ofincomesubject to withholding; and line 4(b) todecreasethe amount
ofincomesubject to withholding. These four possibilities are all related and could be reduced to
one net figure. For example, lines 4(a) and 4(b) work in opposite directions, so the amounts could
be combined into one net amount of additional income or reduction to income.
- Similarly, lines 3 and 4(c) could be combined into one net amount by which to increase or decrease
the amount of tax to withhold. Moreover, the net amount of income adjustment from lines 4(a) and
4(b) could be translated into the corresponding amount of tax adjustment (depending on the
employee?s tax bracket, etc.) then combined with the net amount from lines 3 and 4(c) to
determine the bottom-line amount by which to increase or decrease withholding? just one
number.
- That?s exactly what the Tax Withholding Estimator does, but these four lines are left separate on
the paper Form W-4 so that employees don? have to do the math to get the bottom line (i.e., how
t
much to increase or decrease withholding). That is left to the payroll system.
- However, as the Form W-4 instructions indicate, many employees may find it advantageous for the
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online tool to do the math so that they don? have to reveal as much about their family or finances
to their employer.

LENINTHOMAS@CPA PLLC