W-4 | Nesteggg Accounting

Understanding the New W-4

If you have employees in your business you may know the Internal Revenue Service has revised Form W-4 and is offering answers and guidance online.

New W-4 Form and explanations offered online

If you do your own payroll inhouse the Income Tax Withholding Assistant for Employers can help guide you around the new changes. The redesigned withholding system (no longer based on withholding allowances) went into effect on Jan. 1.
There is even a webinar, Understanding the 2020 Form W-4 and How to Use it to Calculate Withholding posted on the site.
And a new and improved Tax Withholding Estimator that incorporates the changes from the redesigned Form W-4, Employee’s Withholding Certificate, that you can direct your employees to for guidance on how to fill out the new form.

While the IRS does not require a new W-4 Form for all current employees, (employers can continue to use the latest W-4 on file for their workers) it may help employees to understand their withholdings better.

IRS revises 2020 Form W-4

A revised W-4 made available Dec. 31, 2019

The federal government spending bill (The Further Consolidated Appropriations Act, 2020 – HR 1865) signed into law on December 20, 2019, extends the 7.5% medical expense deduction floor through 2020. The floor will not revert to 10% as was set to happen in tax year 2019.

The IRS changed the 2020 Form W-2 to reflect this extended tax provision. The percentage in the text on line 1 of the Step 4(b) – Deductions Worksheet on page 3 of the 2020 Form W-4 was changed from 10% to 7.5%.

The IRS also made one minor editorial clarification on line 4 of that worksheet changing “from Schedule 1” to “from Part II of Schedule 1”.

This revised Form W-4 became available on December 31, 2019.

Copies of the form printed or downloaded before this revision date, can still be used, but those forms will still show the incorrect percentage amount.

This percentage difference only affects a few people, and the impact is likely to be very small, if any. The IRS is currently updating its Tax Withholding Estimator to reflect the 7.5% medical expense deduction to help mitigate errors when taxpayers calculate their withholding estimates.

Improved Tax Withholding Estimator

Though the Tax Withholding Estimator has been around a while the Internal Revenue Service has launched a new and improved Tax Withholding Estimator, in response to the changes to the news Form W-4 for this year.

New withholding method brings new Tax Estimations

The IRS urges everyone to see if they need to adjust their withholding by using the Tax Withholding Estimator to perform a Paycheck Checkup. If an adjustment is needed, the Tax Withholding Estimator gives specific recommendations on how to fill out their employer’s online Form W-4 or provides the PDF form with key parts filled out.

To help workers more effectively adjust their withholding, the improved Tax Withholding Estimator features a customized refund slider that allows users to choose the refund amount they prefer from a range of different refund amounts. The exact refund range shown is customized based on the tax information entered by that user.

Based on the refund amount selected, the Tax Withholding Estimator will give the worker specific recommendations on how to fill out their W-4. This new feature allows users who seek either larger refunds at the end of the year or more money on their paychecks throughout the year to have just the right amount withheld to meet their preference.

The new Tax Withholding Estimator also features several other enhancements, including one allowing anyone who expects to receive a bonus to indicate whether tax will be withheld. In addition, improvements added last summer continue to be available, including mobile-friendly design, handling of pension income, Social Security benefits and self-employment tax.

Starting in 2020, income tax withholding is no longer based on an employee’s marital status and withholding allowances, tied to the value of the personal exemption. Instead, income tax withholding is generally based on the worker’s expected filing status and standard deduction for the year. In addition, workers can choose to have itemized deductions, the Child Tax Credit and other tax benefits reflected in their withholding for the year.

It is important for people with more than one job at a time (including families in which both spouses work) to adjust their withholding to avoid having too little withheld. Using the Tax Withholding Estimator is the most accurate way to do this. As in the past, employees can also choose to have an employer withhold an additional flat-dollar amount each pay period to cover, for example, income they receive from the gig economy, self-employment, or other sources that is not subject to withholding.

Tax planning should include a Paycheck Checkup

Year-round tax planning is important for everyone. Just because a taxpayer already filed their tax return doesn’t mean they don’t need to think about taxes for the rest of the year. In fact, what they do now may affect any tax they might owe next year. It could also affect the refund they expect.

Since federal taxes operate on a pay-as-you-go basis, taxpayers need to pay most of their tax during the year as they earn the income. Taxpayers should make sure they’re having the correct amount of tax withheld from their paychecks. It’s a good idea for taxpayers to do a Paycheck Checkup for these reasons:

Having too little withheld could lead to a smaller than expected refund.
Having too little withheld could even lead to an unexpected tax bill.
Employees who have too much tax withheld will see less money in each paycheck. Having more money in each paycheck may be more helpful than getting a large refund when they file.

Taxpayers can use the IRS Tax Withholding Estimator to check their withholding. All taxpayers should use this tool to do a Paycheck Checkup ASAP if they haven’t already done so in 2019. Some taxpayers should do another Paycheck Checkup even if they already did one this year. This includes anyone whose personal or financial information changes due to a life event. Some life events that can affect withholding are:

Marriage
Having a baby
Getting a new job
Getting a raise at work

Taxpayers who want to change how much tax is withheld from their paycheck simply need to submit an updated Form W-4 to their employer.

The IRS has several digital tools taxpayers can use to stay updated on important tax information that may help with tax planning. In addition to visiting the IRS.gov website, they can download the IRS2Go app, watch IRS YouTube videos, and follow the IRS on Twitter and Instagram.

Here’s what taxpayers should know about making 2019 estimated tax payments

Small business owners, self-employed people, and some wage earners should look into whether they should make estimated tax payments this year. Doing so can help them avoid an unexpected tax bill and possibly a penalty when they file next year.

Everyone must pay tax as they earn income. Taxpayers who earn a paycheck usually have their employer withhold tax from their checks. This helps cover taxes the employee owes. On the other hand, some taxpayers earn income not subject to withholding. For small business owners and self-employed people, that usually means making quarterly estimated tax payments.

Here’s some information about estimated tax payments:

Taxpayers generally must make estimated tax payments if they expect to owe $1,000 or more when they file their 2019 tax return.
Whether or not they expect to owe next year, taxpayers may have to pay estimated tax for 2019 if their tax was more than zero in 2018.
Wage earners who also have business income can often avoid having to pay estimated tax. They can do so by asking their employer to withhold more tax from their paychecks. The IRS urges anyone in this situation to do a Paycheck Checkup using the Tax Withholding Estimator on IRS.gov. If the estimator suggests a change, the taxpayer can submit a new Form W-4 to their employer.
Aside from business owners and self-employed individuals, people who need to make estimated payments also includes sole proprietors, partners and S corporation shareholders. It also often includes people involved in the sharing economy.
Estimated tax requirements are different for farmers and fishermen.
Corporations generally must make these payments if they expect to owe $500 or more on their 2019 tax return.
Aside from income tax, taxpayers can pay other taxes through estimated tax payments. This includes self-employment tax and the alternative minimum tax.
The final two deadlines for paying 2019 estimated payments are Sept. 16, 2019 and Jan. 15, 2020.
Taxpayers can check out these forms for details on how to figure their payments:
- Form 1040-ES, Estimated Tax for Individuals.
- Form 1120-W, Estimated Tax for Corporations.
Taxpayers can visit IRS.gov to find options for paying estimated taxes. These include:
- Direct Pay from a bank account.
- Paying by credit or debit card or the Electronic Federal Tax Payment System.
- Mailing a check or money order to the IRS.
- Paying cash at a retail partner.
Anyone who pays too little tax through withholding, estimated tax payments, or a combination of the two may owe a penalty. In some cases, the penalty may apply if their estimated tax payments are late. The penalty may apply even if the taxpayer is due a refund.
For tax year 2019, the penalty generally applies to anyone who pays less than 90 percent of the tax reported on their 2019 tax return.

More information:
Form 1040 Instructions
Form 1120 Instructions

IRS, Treasury unveil proposed W-4 design for 2020

WASHINGTON –Today the Internal Revenue Service issued a draft of the 2020 Form W-4, Employee’s Withholding Allowance Certificate (PDF), that will make accurate withholding easier for employees starting next year.

The revised form implements changes made following the 2017 Tax Cuts and Jobs Act, which made major revisions affecting taxpayer withholding. The redesigned Form W-4 no longer uses the concept of withholding allowances, which was previously tied to the amount of the personal exemption. Due to changes in the law, personal exemptions are currently not a central feature of the tax code.

“The new draft Form W-4 reflects important feedback from the payroll community and others in the tax community,” said IRS Commissioner Chuck Rettig. “The primary goals of the new design are to provide simplicity, accuracy and privacy for employees while minimizing burden for employers and payroll processors.”

The IRS and Treasury collected extensive feedback over the past year while working closely with the payroll and tax community to develop a redesign that best serves taxpayers.

The IRS expects to release a near-final draft of the 2020 Form W-4 in mid-to-late July to give employers and payroll processors the tools they need to update systems before the final version of the form is released in November. To make additional improvements to this initial draft for 2020, the IRS is now accepting comments for 30 days. To facilitate review of this form, IRS is also releasing FAQs about the new design.

The IRS anticipates the related instructions for employers will be released in the next few weeks for comment as well.

The IRS reminds taxpayers that this draft Form W-4 is not for current use, but is a draft of the form to be used starting in 2020. Employees who have submitted a Form W-4 in any year before 2020 will not be required to submit a new form merely because of the redesign. Employers can continue to compute withholding based on the information from the employee’s most recently submitted Form W-4.

For 2019, taxpayers should continue using the current Form W-4 (PDF). The IRS also continues to encourage people to do a Paycheck Checkup as soon as possible to see if they are withholding the right amount of tax from their paychecks, particularly if they had too much or too little tax withheld when they filed their 2018 taxes earlier this year. People with major life changes, such as a marriage or a new child, should also check their withholding.

The IRS cannot respond individually to those who submit comments, but the agency does appreciate the feedback and will consider all comments received.

Proposed Layout: https://www.irs.gov/pub/irs-dft/fw4–dft.pdf

For Small Business Week: Backup withholding rate now 24 percent, bonuses 22 percent; workers urged to do a Paycheck Checkup

WASHINGTON — The Internal Revenue Service today reminded small businesses that recent tax reform legislation lowered the backup withholding tax rate to 24 percent and the withholding rate that usually applies to bonuses and other supplemental wages to 22 percent. The agency also urged employers to encourage their employees to check their withholding using the IRS Withholding Calculator. [Read more…]

Estimated taxes form and publication can help people pay the right amount in 2019

Estimated taxes form and publication can help people pay the right amount in 2019

WASHINGTON –The Internal Revenue Service today reminded self-employed individuals, retirees, investors and others who pay their taxes quarterly that the first estimated tax payment for tax year 2019 is due Monday, April 15, 2019, for most taxpayers. A 2018 tax return and 2019 Form 1040-ES, Estimated Tax for Individuals, can help these taxpayers estimate their first quarterly tax payment.

The Tax Cuts and Jobs Act changed the way tax is calculated for most taxpayers, including those with substantial income not subject to withholding. The law changed tax rates and brackets, revised business expense deductions, increased the standard deduction, removed personal exemptions, increased the child tax credit and limited or discontinued other deductions. As a result, many taxpayers may need to raise or lower the amount of tax they pay each quarter through estimated tax payments. The 2019 Form 1040-ES and instructions include inflation adjustments for the standard deduction, income tax rate schedules for tax year 2019 and a worksheet to help taxpayers figure estimated tax payments correctly.

A companion publication, Publication 505, Tax Withholding and Estimated Tax, has additional details, including worksheets and examples, which can help taxpayers determine whether they should change their withholding or make estimated income tax payments. This publication may be helpful for those who have dividend or capital gain income, owe alternative minimum tax or have other special situations.

Who needs to pay quarterly?

Most often, self-employed people, including some persons involved in the sharing economy, need to pay quarterly installments of estimated tax. Similarly, investors, retirees and others – a substantial portion of people whose income is not subject to withholding – often need to make these payments as well. Besides self-employment income, other income generally not subject to withholding includes interest, dividends, capital gains, alimony and rental income.

Because the U.S. federal income tax is a pay-as-you-go tax, taxpayers are required to pay the tax as they earn or receive income during the year. If a taxpayer didn’t pay enough tax during the year, either through withholding or by making estimated tax payments, the taxpayer may normally have to pay a penalty. Recent major tax law changes affect most taxpayers, and while the vast majority are on track to receive a refund, others are finding that they owe on their taxes. Many taxpayers who owe for 2018 may qualify for a waiver of the estimated tax penalty that normally applies.

For 2019, an estimated tax penalty will generally apply to anyone who pays too little tax, generally less than 90 percent of the tax reported on their 2019 income tax return, during the year through withholding, estimated tax payments or a combination of the two. In addition, individuals who base their payments of estimated tax on last year’s tax will not be subject to a penalty if they pay 100 percent of the tax reported on their prior year’s return (110 percent if their income was more than $150,000).

Exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers, fishermen, casualty and disaster victims, those who recently became disabled, recent retirees, and those who receive income unevenly during the year. See Form 2210 and its instructions for more information.

Employees have a choice

Many employees who also receive income from other sources may be able to forgo making estimated tax payments if they increase the amount of income tax withheld from their pay instead of making estimated tax payments. They can do this by claiming fewer withholding allowances on their Forms W-4, Employee’s Withholding Allowance Certificate, by completing the Deductions, Adjustments, and Additional Income Worksheet in the instructions to Form W-4. Taxpayers can also ask their employer to withhold an additional flat-dollar amount each pay period.

Do a Paycheck Checkup

Because of the far-reaching tax changes from the Tax Cuts and Jobs Act, the IRS urges all employees, including those with other sources of income, to perform a Paycheck Checkup every year. This means taking steps now to help avoid an unexpected tax bill and possibly a penalty next year when they file. Taxpayers can use the IRS Withholding Calculator available on IRS.gov to do a Paycheck Checkup. However, employees who expect to receive long-term capital gains or qualified dividends, or employees who owe self-employment tax, alternative minimum tax, or tax on unearned income of minors, should use the instructions in Publication 505 to check whether they should change their withholding or make estimated tax payments.

To use the IRS Withholding Calculator, taxpayers should have their 2018 tax return and their most recent paystubs available. The Withholding Calculator results will recommend the number of allowances the employee should claim on their Form W-4. If the Withholding Calculator suggests a change, the employee should fill out a new Form W-4 and give it to his or her employer.

Although the calculator is primarily designed for employees who receive wages, it can also be helpful to some recipients of pension and annuity income. Pension and annuity recipients can change their withholding by filling out Form W-4P and giving it to their payer.

How and when to pay

For tax year 2019, estimated tax payments are due from individual taxpayers on April 15, June 17, Sept. 16 and Jan. 15, 2020. Taxpayers who have not yet filed their income tax returns and are due a refund of their 2018 federal income tax may be able to reduce or even skip one or more of these payments by choosing to apply their 2018 tax overpayment to their 2019 estimated tax. See Form 1040 and its instructions for more information.

Taxpayers in presidentially declared disaster areas may have more time to make these payments without penalty. Visit the Tax Relief in Disaster Situations page for details.

The fastest and easiest way to make estimated tax payments is electronically using IRS Direct Pay or the Treasury Department’s Electronic Federal Tax Payment System (EFTPS). For information on other payment options, visit IRS.gov/payments. For those who choose to pay by check, it must be made payable to the United States Treasury.

Taxpayers can get more information about tax withholding and estimated tax on the IRS’s Pay As You Go web page, as well as in Publication 505, Tax Withholding and Estimated Tax.

Get Ready for Taxes: Make estimated payments now

Get Ready for Taxes:
For many, time is running out to avoid a tax-time surprise; Check withholding, make estimated payments now

Many taxpayers, at risk for having too little tax withheld from their pay, can avoid a surprise year-end tax bill by quickly updating the withholding form they give to their employer, according to the Internal Revenue Service.

Although the tax reform law, enacted last December, lowered tax rates for most taxpayers, it also nearly doubled the standard deduction and limited or discontinued many deductions, among other changes. As a result, taxpayers who itemized in the past who now choose to take advantage of the increased standard deduction, as well as two-wage-earner households, employees with non-wage sources of income and those with complex tax situations, are at most risk of having too little tax withheld from their pay. This is especially true if they didn’t update their withholding earlier this year.

With employees typically only having one or two pay dates left this year, time is running out to remedy any shortfall through increased withholding. In many cases, affected employees may need to ask their employers to withhold an extra flat-dollar amount from their pay to cover any possible shortfall.

This is the fourth in a series of reminders to help taxpayers Get Ready for the upcoming tax filing season. The IRS has updated its Get Ready page with steps to take now for the 2019 tax filing season. Among other things, the page includes new Publication 5307, Tax Reform Basics for Individuals and Families, designed to help taxpayers learn about how this legislation may affect the 2018 return they file next year.

Due to tax reform, many employees’ withholding decreased in early 2018, giving them more money in their paychecks this year. As a result, many may receive a smaller refund or even owe tax, especially if they did not adjust their withholding after the withholding tables changed.

Ever since the revised withholding tables went into effect, the IRS has been urging employees to perform a Paycheck Checkup. The fastest and easiest way to do that is to use the Withholding Calculator, available on IRS.gov.

To use this tool most effectively, have a copy of last year’s tax return handy, as well as recent paystubs. After answering the Withholding Calculator questions, the tool will recommend the number of allowances to claim on the Form W-4, Employee’s Withholding Allowance Certificate, a form an employee gives to their employer. With few pay dates left this year for the typical employee, the Withholding Calculator will often recommend that the employee also have an additional flat-dollar amount withheld from their pay each pay period.

The IRS urges employees to fill out a new Form W-4 and give it to their employer as soon as possible. If it’s already too late to do that, another option is to make an estimated tax payment to the IRS. Estimated tax payments are also a good idea for anyone who receives income not subject to withholding, such as interest, dividends, self-employment, capital gains, prizes and awards.

Form 1040-ES, Estimated Tax for Individuals, available on IRS.gov, is designed to help taxpayers figure these payments simply and accurately. For more information on making estimated or additional tax payments, visit the Pay As You Go, So You Won’t Owe page.

What’s the Difference with Tax ID, Employer ID and ITIN?

What is the Difference Between a Tax ID, Employer ID, and an ITIN?

A Taxpayer Identification Number is a generic term used by the Internal Revenue Service to designate the types of numbers which it allows to be used for tax and identification purposes. While these numbers can be used for identification purposes, they are primarily used to track payments to individuals for federal income tax and other tax purposes.

The possibilities for types of taxpayer ID numbers include:
Social Security number (SSN). A social security number is the most common identifier for personal identification and tax purposes.
Employer ID number. An Employer ID (or EIN, for short) is a federal tax identification number for businesses. Although it’s labeled as an identifier for “employers,” you don’t have to have employees to need an EIN.
Individual Taxpayer ID number (ITIN)
What is an Individual Taxpayer ID Number (ITIN)?
An Individual Taxpayer Identification Number (or ITIN) is nine-digit number issued by the IRS to individuals who must have an identifying number but who are not eligible for a Social Security Number or an Employer ID Number.

ITIN’s are for tax reporting purposes only; they cannot be used for identification purposes. You must get a Social Security number from new employees to be used on Form W-4. An ITIN cannot be used to authorize work in the U.S. or provide eligibility for Social Security or other benefits.

What Taxpayer ID Do LLC’s, Partnership’s, or Corporation’s Use?

Businesses that are registered with the IRS typically use an Employer ID number for business identity. An Employer ID number (EIN) is used by all other types of businesses, even if the business has no employees. Banks often require a new business to have an EIN before they can open a business bank account. You can apply for an EIN online at the IRS website.

Do Businesses Need an ID Number?

If you do business in a state, including having income, hiring employees or selling goods or services, you will also need to get a state tax identification number for . This number is issued when you register with your state government (Secretary of State).