Employees are required or are permitted to file an updated Form W-4 (Employee’s Withholding Certificate) in certain circumstances, as discussed more fully in the following paragraphs.
Note: The 2020 Form W-4 has been redesigned based on changes made by the Tax Cuts and Jobs Act. To increase the accuracy of federal income tax withholding (FITW), employers should encourage their employees to submit a 2020 Form W-4. However, the employer cannot require employees to submit an updated Form W-4.
Changes Affecting the Current Year
If an employee’s tax situation has changed such that FITW should be increased (e.g., the employee has fewer deductions or tax credits) from the withholding provided for on the current Form W-4, a new Form W-4 generally must be provided to the employer within 10 days or the employee risks a $500 penalty.
Example Occurrence of an event increasing withholding
John’s current Form W-4 indicates that his status is married filing jointly. John divorces during the year. He should provide a new Form W-4 indicating single filing status. (Presumably, the new form must be filed within 10 days of the date the divorce becomes final.) John’s new Form W-4 will take effect no later than the beginning of the first payroll period ending on or after the 30th day after the day it is furnished to his employer.
Examples of reasons an employee may need to file a new Form W-4 to increase withholding include the following:
- Divorce or legal separation.
- Spouse begins working.
- The employee no longer expects to be able to claim a child tax credit for a dependent.
- The employee anticipates the receipt of more income than originally estimated or anticipates fewer deductions or credits than originally estimated.
- The employee has filed for Chapter 11 bankruptcy and may not be entitled to the same deductions or credits claimed on a Form W-4 previously provided to the employer, such as for certain deductions or credits that now belong to the bankruptcy estate; or the bankruptcy estate may be taxed at a higher rate.
- The employee expects to owe additional 0.9% Medicare tax and/or the 3.8% net investment income tax when filing an income tax return.
Observation: An employee does not have to adjust withholding for the remainder of the employee’s tax year if a spouse or dependent dies during the year.
Conversely, the employee may file a new Form W-4 to provide information that will decrease withholding at any time due to certain changes, including the following:
- A spouse stops working.
- A child is born to, or adopted by, the employee.
- The employee anticipates the receipt of less income or more deductions or credits than originally estimated.
Employers must withhold based on the updated Form W-4 as of the beginning of the first payroll period ending (or the first payment of wages made without regard to a payroll period) on or after the 30th day after the employee furnishes the updated form. However, the employer has the option to begin withholding based on the new form with the first date that wages are paid after the employee furnishes the updated form (if before the statutorily mandated effective date).
Changes Affecting the Following Year
A separate set of rules applies if the employee reasonably expects that withholding should change for the following year due to a change in circumstances. If the expected change results in an increase in withholding (e.g., a child tax credit will not apply in the next year), a new Form W-4 must be filed on or before December 1 (or within 10 days if the expected change occurs during December), or the employee risks a $500 penalty. Conversely, if the expected change results in a decrease in withholding, a new Form W-4 may be filed on or before December 1 (or within 10 days if the expected change occurs during December).
Changes in status that result in an increase in withholding for the succeeding year include the following:
- A spouse or dependent dies.
- The employee does not expect in the coming year to be able to claim a child tax credit for a dependent on his or her tax return for whom the employee is claiming on his or her current Form W-4.
Where the updated Form W-4 affects the following calendar year, the employer is not supposed to withhold based on that form during the year in which it is furnished.