What Replaced W2 Exemptions on the New W-4 Form?

The United States operates on a pay-as-you-go tax system, where you pay income taxes throughout the year as you earn. For most people, this is accomplished through tax withholding from their paychecks. Your employer uses information you provide to estimate the amount of annual income tax you will owe and remits a portion of that amount to the Internal Revenue Service (IRS) from each paycheck.

When your circumstances change, such as getting married or having a child, the amount of tax you owe also changes. This requires an update to your withholding information to prevent over or underpayment of taxes.

The Shift from Allowances to the Current System

Prior to 2020, the amount of tax withheld from an employee’s paycheck was determined by a system of “withholding allowances.” Employees would claim a certain number of these allowances on their Form W-4 based on their marital status, the number of dependents they had, and other factors. The more allowances an individual claimed, the less federal income tax was withheld, but the term “allowances” was not always clearly understood.

The Tax Cuts and Jobs Act of 2017 (TCJA) brought changes to the tax code, including the elimination of personal and dependency exemptions. These exemptions were directly tied to the value of a withholding allowance, making the old Form W-4 system obsolete. As a result, the IRS redesigned the Form W-4 to align with the new tax laws and improve the accuracy of the withholding process.

The redesigned Form W-4, introduced in 2020, did away with withholding allowances entirely. It uses a more direct, five-step process that accounts for an individual’s specific financial situation, such as multiple jobs, spousal income, dependents, and other income and deductions. This change was intended to help employees more accurately match their tax withholding to their actual tax liability. Employees who have not changed jobs or had significant life changes since 2019 are not required to fill out the new form; their employers will continue to use the information from their last submitted W-4.

Information Needed to Complete Form W-4

Before you begin filling out your Form W-4, it is helpful to gather the necessary information. You will need your full name, address, Social Security number, and your tax filing status, which can be Single, Married Filing Separately, Married Filing Jointly, or Head of Household.

If you have more than one job or are married and your spouse also works, you will need recent pay stubs for all jobs. This information is necessary to determine your total household income. The IRS also provides a Tax Withholding Estimator tool on its website, which can be a resource for accurately calculating your withholding, especially in more complex situations.

You will also need to know the number of qualifying children under the age of 17 and the number of any other dependents you plan to claim. Finally, you should have estimates of any other income you expect to receive that is not from a job, such as interest, dividends, or retirement income. You will also need to know if you plan to claim deductions other than the standard deduction, such as for student loan interest or contributions to an Individual Retirement Arrangement (IRA).

Step-by-Step Guide to Completing Form W-4

Completing the Form W-4 involves a five-step process, but not all steps will apply to every individual. Only Step 1, for personal information, and Step 5, for your signature, are required for everyone.

Enter Personal Information

In Step 1, you will enter your name, Social Security number, address, and select your tax filing status. Your filing status is a factor in determining your standard deduction and tax rate.

Multiple Jobs or Spouse Works

Step 2 is for individuals who have more than one job or are married filing jointly and their spouse also works. You have three options in this step. You can use the IRS’s online Tax Withholding Estimator, use the Multiple Jobs Worksheet provided with the form, or simply check a box if you and your spouse each have one job with similar pay.

Claim Dependents

In Step 3, you will claim your dependents. If your total income is $200,000 or less ($400,000 if married filing jointly), you will multiply the number of your qualifying children under age 17 by $2,000 and the number of other dependents by $500. You will then enter the total amount on the designated line.

Other Adjustments

Step 4 is for other adjustments, such as other income not from jobs, deductions you plan to take, or any extra tax you want withheld from each paycheck. You will enter the total amount of other income in 4(a), your total deductions in 4(b), and any extra withholding in 4(c).

Sign and Submit

The final step is to sign and date the form. Once completed, you will submit the form to your employer’s payroll department. Your employer will then use this information to calculate the amount of federal income tax to withhold from your pay.

Claiming Exemption from Withholding

It is possible to claim an exemption from federal income tax withholding, but only under specific circumstances. This means that your employer will not withhold any federal income tax from your paychecks. However, Social Security and Medicare taxes will still be deducted.

To qualify for an exemption, you must meet two conditions. First, you must have had no federal income tax liability in the previous year. Second, you must expect to have no federal income tax liability in the current year. If you meet both of these requirements, you can claim an exemption from withholding.

To claim an exemption on your Form W-4, you will complete Step 1 with your personal information. Then, you will write the word “Exempt” in the space provided below Step 4(c) and proceed to Step 5 to sign and date the form. An exemption from withholding is only valid for one calendar year. To continue being exempt from withholding for the next year, you must submit a new Form W-4 claiming the exemption by February 15. If you fail to submit a new W-4 by the deadline, your employer must begin withholding tax as if you are single with no other adjustments.