The W-4 form was redesigned in 2019 to both simply it and account for changes in tax law. For the most part, the new design has simplified the task of determining how much withholding to apply to an employee's paycheck. However, there is one step in the new form that is confusing. It is a step 2.
Step 2 gives employees an opportunity to account for additional income from other jobs in order to increase withholding. The step, along with steps 3 and 4, are voluntary; employees are not required to complete them. However, there are particularly good reasons for doing so. Completing step 2 could help an employee avoid a tax bill in the spring.
Not Withholding Enough
Those who redesigned the W-4 included step 2 in order to help employees who might not have enough being withheld from their paychecks. A lack of sufficient withholding ultimately leads to a taxpayer owing the government come April. That is not a good position to be in. The problem arises when an employee works multiple jobs.
Let us say you have an employee with one full-time job and two part-time jobs. He may not make enough from the part-time jobs to have anything withheld. That is immaterial to Uncle Sam at tax time. Why? Because the employee's three jobs are not taxed separately. All of his income is combined into a single sum for tax purposes.
This means that if nothing is being withheld from the paychecks of his two part-time jobs, the employee is likely not paying enough through his full-time job to cover his total tax bill. He will end up owing at tax time. Step 2 is on the new W-4 form to address this problem. By accounting for the two part-time jobs on the W-4 of the full-time job, he can have an appropriate amount withheld to cover his combined tax liabilities.
Three Options for Step 2
Employees have three options when completing step 2. Those options are represented as options A, B, and C. Option A allows the employee to use the IRS' Tax Withholding Estimator app to determine how much should be withheld in total. It is freely available on the IRS website.
The app is as easy to use as a word processor. Just by entering a few pieces of information along with the average pay the employee receives for each job, the tool will calculate total withholding. That amount is entered on the W-4 form.
Option B allows the employee to use the Multiple Jobs Worksheet to calculate total combined withholding. This worksheet is found on page 3 of the W-4 form instructions. It essentially does the same thing as the online tool but requires manual calculations.
Option C is intended for couples who have a total of two jobs between them. No manual calculations need to be made to use it. Both employees simply check the appropriate box in step 2(c) and that's it. Employers will know to cut the standard deduction and tax bracket calculations in half for both employees at their respective jobs. This will virtually ensure that enough is withheld.
Employees May Need Help
Although the new W-4 form is intended to be easier to complete, step 2 might be confusing enough that employees need help figuring it out. It behooves payroll and HR personnel to understand each of the options in step 2 and how they might apply to different situations. Getting step 2 right is important if employees want to avoid paying too much or too little via withholding.