Embracing the New W-4: 2023 Updates

Every hourly and salaried employee in the United States must complete a W-4 tax form. This form tells employers how much income tax to withhold from each paycheck. Employees always fill out this form when they start a new job, but they can also fill out a new form to adjust their withholding at any time.

The new W-4 has been out for a while now, but all the changes made to how the calculations work still have many people scratching their heads. To help, I'll address some of the most frequently asked W-4 questions I get from EP customers below.

2023 W-4: Questions & Answers

How does the new W-4 work, and how is it different than the original?

The IRS redesigned the form in 2020 with the goal of helping workers calculate more accurate income tax withholding. For a full overview of how the form works and how to fill it out, check out How to Adjust Your Tax Withholdings Using the New W-4.

Pro-tip: When adjusting your withholdings, don't forget to use our handy W-4 Visual Guide!

Which W-4 steps are mandatory to fill out?

There are five sections on the new W-4. The only two sections that are mandatory are step 1 and step 5. Steps 2, 3, and 4 are optional.

Here’s what each step does:

• Step 1: Collects personal identifying information (legal name, address, social security number, filing status).
• Step 2: Allows employees to indicate that they either have multiple jobs or that they file taxes jointly with a spouse or domestic partner who also works.
• Step 3: Allows employees to self-report dependents and other tax credits to achieve more accurate withholding calculations.
• Step 4: Allows employees to make additional adjustments to customize their withholding.

When should employees use the check box under step 2(c)?

Section 2, subsection (c) reads: "If there are only two jobs total, you may check this box. Do the same on Form W-4 for the other job. This option is accurate for jobs with similar pay; otherwise, more tax than necessary may be withheld."

It may make sense for an employee to check the box in step 2(c) in two specific circumstances:

1) If they have two hourly or salaried jobs that bring in approximately the same income or, 

2) If they file taxes jointly with a spouse who makes roughly the same income

As noted on the form, it's important to confirm that the jobs being considered are anticipated to bring in similar incomes. If earnings are drastically different, checking this box won't result in accurate withholdings.

For this option to work correctly, it’s important to make sure box 2(c) is checked on both affected W-4s. In a situation where someone has multiple jobs, the employee must check box 2(c) on the W-4 they submit to each of their employers. In the case of a couple filing jointly, both spouses must also check box 2(c) on their individual W-4.

What number should employees enter in steps 3, 4(a), 4(b), and 4(c)?

Some parts of the W-4 require employees to enter an annual figure, while others require taxpayers to enter a pay period amount. This part can get a bit confusing, so read carefully.

Numbers written into the following sections should be recorded as annual amounts.

• Step 3—claim credits; employees can specify the amount of dependent, child, foreign tax, and other credits they plan to claim this tax year.
• Step 4(a)—other income not from jobs; amount of income an employee expects to make this year from sources other than employment.
• Step 4(b)—deductions; employees who itemize deductions rather than claiming a standard deduction can write in their anticipated deduction amount here.

This means adjustments made to withholdings (increases or decreases) based on credits, other income, or deductions are applied over the course of a year.

In step 4(c), which allows employees to specify an extra withholding in the amount of their choice, taxpayers should record the dollar amount they’d like to be withheld each pay period.

Some folks use this option to set up automated savings. Since the money is withheld from their check, the payee isn’t responsible for setting it aside after it comes into their account, which forces them to ‘save’ a particular amount each pay period. Employees who use this option will receive any additional withholdings in the form of a refund after they file their taxes for the year.

What’s the value of adding dependents or credits in step 3?

Adding dependents or credits in step 3 helps employees improve the accuracy of their withholding amount by taking ancillary life and financial factors that impact tax deductions into consideration. Tax credits reduce an employee’s tax obligation dollar-for-dollar. Entering an amount on line 3 will reduce withholdings by that amount of money over the course of a year.

The most common reason to populate line 3 is to claim credits related to dependent children, but this section can also be used for other credits, including foreign taxes, education credits, mortgage interest, and charitable contributions. Step 3 can also be used to reduce withholdings if an employee has already had too much income tax withheld for the year.

How should exempt employees and non-resident aliens fill out the new W-4?

Employees filing as exempt or as a non-resident alien should only fill out step 1 and step 5. They should also write ‘exempt’ or ‘NRA’—whichever is applicable—in step 4(c).

Will the numbers employees enter increase or decrease their withholdings?

This new form offers employees four ways to change their withholdings, depending on how much they work throughout the year.

Those sections include:

• Step 3 – Credits, allows employees to note any relevant tax credits they expect to receive
• Step 4(a) – Other income not from jobs, allows employees to list any additional sources of income not related to employment
• Step 4(b) – Deductions, allows employees to list any non-standard deductions they expect to receive
• Step 4(c) – Additional withholding, allows employees to request additional money in the amount of their choosing be withheld from their paycheck each pay period

Here’s how numbers that are written into each section impact employee withholdings:

• Amounts recorded in steps 3 and on line 4(b) will DECREASE withholdings
• Amounts recorded in steps 4 (a) and 4(c) will INCREASE withholding

How do employees determine which sections to fill out?

Taxes can be tricky in the production business because hours and earnings tend to change a lot throughout the year. To get the most accurate withholding, encourage employees to use the IRS Withholding Estimator a couple of times each calendar year. Doing so helps them adjust their W-4 accordingly to make sure they’re not over or underpaying income tax.

Still have questions about the new W-4? Feel free to contact EP at taxsupport@ep.com or speak to your tax advisor.

This blog contains general information we are providing on a subject that may be of interest to you. Nothing in this blog should be considered tax advice. You should consult with your tax or legal advisors regarding the applicability of any of these rules to your specific circumstances and how best to handle them.