In case you haven’t heard, the IRS made a big change to Form W-4 for 2020.
As a refresher, the W-4 is the form you give your employer (production) to tell them the rate at which you want federal income taxes withheld from your paycheck.
The current (now old) W-4 had a section that required you to enter an “allowance” number from 0 to 9, or the word “EXEMPT.” That number, combined with your category (Single, Married, or Married but withhold at higher Single rate) determined the federal tax withholding rate.
When you would file taxes in April, you’d then find out if you had too much or too little withheld… or somehow pretty much Goldilocksed it.
What changed on the 2020 W-4
The now-released W-4 for 2020 serves the same purpose as the older versions, but gets to the calculation in a very different way. The biggest change is that there is no longer a place to enter a single-digit allowance number.
Due to the increased standard deductions defined by the 2017 Federal Tax Cuts and Jobs Act, the new form does away with the allowance number altogether, and the categories are updated:
- Single or Married filing separately
- Married filing jointly
- Head of household
The rest of the form is optional (except the signature at the end – that’s required), and includes worksheets for adjusting your withholding based on dependents, your spouse’s job(s) and any concurrent other jobs you may have.
What does it all mean for production crew?
Admittedly, production crew members and other short-term employees, freelancers, and W-2 gig workers may have a tougher time filling out the W-4 than your average fulltime nine-to-fiver.
When the new W-4 asks about multiple jobs in a year, freelancers will be disappointed to find there is no “Duh” response option. It may be helpful to consult with a tax professional to determine the best way to fill out the W-4 for your own particular situation.
Here’s why the IRS cares about how many jobs you have
The new tables and worksheets were not just designed to drive you nuts; they actually serve a purpose. To understand what it is, we need a little context.
To owe or not to owe
As much as you may look forward to getting a big tax refund at the end of the year, the government likes it even more than you do. Why? Because it means you gave them an interest-free loan for the year, which they don’t have to pay back until April. Pretty good deal!
On the other hand, if you have too little income tax withheld over the course of the year – and end up owing money at tax time – that means the opposite is true: the government gave you an interest-free loan over the course of the tax year! That’s not their favorite.
And for some taxpayers, owing taxes in April comes as a surprise… an unpleasant one, even. To make matters worse for the IRS, not everyone is willing or able to pay up when it comes time to collect. That means shortfalls.
Balancing it out
If, when you fill out your W-4, there’s no way to indicate that you have other concurrent income or possibly a sizable additional household salary from a spouse, withholding will be at a lower tax rate/bracket than actually applies to your situation… so you’ll end up being undertaxed, and owe big in April.
As we saw above, the government doesn’t like you to owe. So they worked out a way to learn about your other household income on the W-4, so there are fewer surprises for everyone on Tax Day. Make sense?
Note: The new sections of the new W-4 having to do with dependents and other expected deductions (such as mortgage interest, etc.) are designed to decrease your taxes withheld on each paycheck. It’s all about trying to hit the true rate as closely as possible.
Do some figuring in advance
There may be some trial and error for freelancers. Just keep in mind that, as seen above, the IRS isn’t trying to punish you for having 50 jobs over the course of 52 weeks. They’re just trying to get your ballpark annual income, so the best withholding estimates can be applied. It’s also worth noting that you can just turn in a new W-4 anytime you want during a job, to fine-tune your withholdings for the next check.
We recommend looking at the worksheets in advance, so you’ll be ready for that first W-4 in January. (By the way, if you have an ongoing job you’re already on, and an old-timey W-4 on file, there is no requirement to submit a new one.)
You can also try some tax calculations in advance, to see where you land. The IRS offers an estimator here… use that in conjunction with some sound tax advice from a CPA, and you’ll be ready for the dawn of the new decade. At least as far as the W-4’s concerned.
Need payroll services for your production crew? See how Media Services can help.