Tax season is stressful, we won’t deny it. Even if you’re a HENRY™ [High Earner, Not Rich Yet] and seriously leveling up your financial game, it can still be a punch to the gut to hear that you owe thousands of dollars come tax season.
Whether or not you owe money at tax-time depends largely on how you fill out your W-4 form.
What is a W-4 form?
The purpose of the W-4 is to provide your employer with an estimate of how much money they should withhold from your paycheck for taxes. Depending on how you fill out your W-4…
Your employer can withhold too much – which means you’ll likely get a check in the mail from the IRS when you file your taxes next year.
Your employer can withhold too little – which means you’ll likely owe money when you fill out taxes next year.
Good news, the W-4 has been redesigned for 2020 and is arguably easier to fill out – wondering why you should care?
Fill out the new form and you’ll be less likely to owe a sh*t ton of money when you do your taxes next year.
What changed on the W-4 form in 2020?
Things are getting simpler, and easier.
Does the word “allowances” mean anything to you? Maybe you remember them from the last time you filled out a W-4, maybe not.
TL;DR – allowances are a thing of the past (at least for now). No more magic “0” or “1” to determine how much money your employer will withhold from your paycheck.
Another point of confusion on the old W-4 form, “head of household”. On the new W-4 form, you’ve got 3 clear options, and they’re spelled out.
For most HENRYs, the goal is to break even at tax time if possible. That means you don’t owe the government and they don’t owe you. That said, it’s difficult to accomplish without the help of an accountant. With the old form, there were a few hacks we’d suggest that favored our preferred outcome – getting a modest refund instead of owing the IRS (because we know exactly what happens when you find out you owe money, you think, “and where is that sh*t supposed to come from?”) With the new form, there’s really no hack to filling it out. Answer honestly, and with the form’s increased simplicity, there’s a solid chance your withholdings will be more accurate because of it.
The more accurate your W-4 form is, the more accurate your withholdings will be – which will reduce the risk that you owe thousands to the IRS when you go to pay taxes next year.
You can update your W-4 form with your employer at any time. With the new W-4 form out, we recommend updating yours now.
Should I update my W-4 if nothing’s changed?
Most employers aren’t requiring employees to update their W-4 with the new 2020 form, but it’s a good idea to do it anyway.
You benefit from your W-4 form being as accurate as possible. Use the IRS’ withholdings calculator to help you fill it out. The more accurate your W-4 form is, the more accurate your withholdings will be – which will reduce the risk that you owe thousands to the IRS when you go to pay taxes next year.
If you’re thinking “eh I bet I’ll be fine”, we get it. Updating forms isn’t a world of fun. But it’s quick and easy to do so.
At the very least, make sure you update your W-4 after major events like having a kid, getting married or divorced, your salary changes notably (up or down), or if you or your spouse start a side hustle or get an additional job.
To update your W-4 form, talk to your employer, HR department, or log in to your employee portal through work.