By Julie Dale, CPA-Austin
The IRS redesigned the 2020 Form W-4 in an effort to provide more accurate withholding from wage income. This was a worthwhile goal since tax professionals had seen that there were many cases where too little was being withheld under the old system and were regularly advising clients to withhold extra to help deal with this issue. The IRS FAQs on the new form indicate that it was also an effort to reduce the complexity, but I personally feel that they did not succeed on this goal. I believe many other taxpayers and accountants agree that the new Form W-4 is more complex and difficult to complete correctly.
Taxpayers rarely had questions on the previous version of the Form W-4. There was a tendency for too little to be withheld in many cases, but this was fairly easily rectified with some quick calculations. If the taxpayer owed $5,200 in a given tax year, then the Form W-4 for one spouse could be modified to request additional withholding of $200 per pay period assuming a bi-weekly pay cycle.
The previous version of the Form W-4 was so simple that most pay stubs would include information on the details of what was provided on the Form W-4, such as a notation of “M/2/$50” to indicate that the taxpayer is claiming married with two allowances and $50 of additional withholding per pay period. With this additional information included on the pay stubs, it helped us advise taxpayers on how to appropriately change withholding because we knew the starting point for preparing a Form W-4 and we simply had to increase the additional withholding amount. The 2020 version of Form W-4 added so many different inputs that pay stubs no longer contain the information on what the taxpayer submitted on Form W-4. We now must ask taxpayers for a copy of the Form W-4 submitted to know our starting point. Payroll software has not found a good standard method of providing this information on the pay stubs.
If we have no starting point on a taxpayer since the job is entirely new, then it is difficult for us to calculate what the employer will withhold on the first paycheck. The IRS provided a Tax Withholding Estimator tool, but this tool requests much more information than is included on the Form W-4. For example, one of the early questions is the spouse’s most recent pay period end. As a CPA trying to advise our clients, it isn’t possible for us to use this tool unless we ask the client for a lot of information.
I believe that the current complexity of the Form W-4 leads to more uncertainty on how to complete the form and how much will be withheld each paycheck. I would encourage the IRS to revisit the Form W-4 to see if there is a better method. The income tax laws are so complex that it is impossible for a taxpayer to understand the terms of art used even in the Form W-4 instructions. It seems like there should be a better method to handle income tax withholding that does not require reading and understanding an entire publication to do so correctly.
Our clients also seek our guidance on how to complete the Form W-4 and even with our knowledge and understanding of the tax laws, it sometimes feels like a futile endeavor. Taxpayers tend to prefer correct income tax withholding from paychecks, but in many cases are relying on quarterly estimated tax payments or paying the tax owed with the return filing due to the lack of guidance and understanding of the newer Form W-4. In the worst circumstances, it may be possible that the IRS is not collecting the full tax owed because the taxpayer submits an offer in compromise to reduce the tax burden when the return is filed. It is crucial that the IRS helps taxpayers comply with the tax laws by providing an intuitive Form W-4.