If you thought the massive overhaul of the 2020 Form W-4 (its first big update in 30 years) would be it for a while, you were right… kind of. You need to be aware that, while the changes aren’t as massive as the 2020 form, you will see some differences in the supporting tables for last year’s form and this year’s for new employees and employees who need to update their withholding.
What is a W-4 Tax Form?
The W-4 is still an important part of compliance landscape, completed whenever an employee starts a new job or modifies their withholding status. If you haven’t had to use the 2020 form yet, here’s a refresher course on it with the changes for the 2022 W-4 form.
History of the W-4
The federal income tax is a pay-as-you-go tax: you must pay the tax as you earn or receive income during the year. Employees use Form W-4 to let their employer know the amount to withhold and pay for federal income taxes on each paycheck. An employee’s elections on Form W-4 provide the employer with the factors needed to accurately calculate withholding. If an employee does not correctly fill out a W-4, too little tax may be withheld and result in the person owing tax to the IRS when they file their individual return, including potential penalties. If too much federal tax is withheld per paycheck, the individual will overpay the IRS and will receive a refund at the end of the tax year.
For decades, the basis of federal income tax withholding from employees has been marital status and number of allowances. Employees and employers are familiar with terminology such as “Married-3” or “Single-2.” But those designations have changed. With the passage of the Tax Cuts and Jobs Act in December 2017, Congress eliminated withholding allowances as the basis for federal income tax calculation. Because of the sweeping nature of that legislative change, the IRS delayed implementation of a new withholding system in 2018 and 2019. After a few agency revisions and drafts, the redesign of Form W-4 in 2020 aligned the employee’s withholding elections with the language in the federal tax code.
What Changed for Employees?
If an employee had a year 2019 or earlier Form W-4 on file with their employer, those withholding elections could remain in place. The IRS doesn’t require employers to update all existing employees to 2020 W-4 forms, and the same applied for 2021. However, if an employee wanted to make any changes to their federal withholding elections in 2021 or this year, they’ll have to use the new form.
The 2017 Tax Cuts and Jobs Act made some significant updates to the tax code, one of which was to nearly double the standard deduction (from $6,500 to $12,000 for single filers and from $13,000 to $24,000 for joint filers). The standard deductions have increased for 2021 and 2022 as shown in the table below.