The start of the new decade presented many significant changes that impact paychecks. Federal, state, and local tax rates across the country typically change with the coming of the new year. Wage bases also change at the Federal and state level.
Team PaycheckCityFeb 2020
This year, the IRS increased the Social Security wage base limit, and many states increased their state wage bases as well. Read more from PaycheckCity on the 2020 wage base changes. If this weren’t enough, the introduction of the new 2020 Federal Form W-4 also impacts paychecks significantly depending on how employees utilize the new fields to update their withholding.
In a previous article about the initial updates to the 2020 Form W-4, we explained the new criteria listed on the 2020 Form W-4. Besides the form's new layout, the most significant change on the new Form W-4 is the elimination of withholding allowances. Instead of allowances, taxpayers are expected to fill out their income from other jobs. This significant change on the new Form W-4 requires changes to the fields in the calculator. Now, you have the option to fill out your dependents, other income, deductions, and additional federal withholding.
So how can employees best understand what the impact of the new Federal Form W-4 along with the changing tax rates and wage bases is on their paychecks? By using the Dual Scenario Paycheck Calculator on Paycheckcity.com, employees can compare their 2019 paychecks to their 2020 paychecks, as shown below. The calculator on the left has a check date in 2019 and the 2019 W-4 fields displayed, whereas the calculator on the right has a check date in 2020 and the 2020 Form W-4 selected, which presents different fields according to the new Form W-4's information. This selection is made via the "Use 2020 W-4" checkbox within the calculator.
After filling out the information for their 2019 paycheck and Form W-4 information and their 2020 paycheck and Form W-4 information, upon clicking the "calculate" button, the results of each calculation will be displayed side by side, as shown below. In this particular demonstration, we used $75,000 as the salary. For the 2019 Form W-4 calculation, we calculated one federal allowance and filed as single. For the 2020 Form W-4, we filed as single and left the next five sections blank. This calculation shows that if the 2020 Form W-4 is used and based on 2020 tax rates, then there will be a $43.18 difference in net pay, which differs specifically in the Federal Withholding amounts. That’s quite an increase in net pay per paycheck!
The Dual Scenario calculator can also be used to show side by side results of check calculations in different years with the same Federal W-4. For example, an employee may wish to compare his or her take-home pay from 2019 to 2020 with their selections from the 2019 Federal W-4 persisting as employees are not required to complete a 2020 Federal W-4 if their employer already has a previous year W-4 on file for them. Selecting check dates in different years will allow the employee to see the impact on withholding for different tax rates.
While a new tax year and the new 2020 Federal Form W-4 may be intimidating at first glance, PaycheckCity has the necessary resources to help employees better understand their paychecks. Stay tuned for more updates and resources!
These free resources should not be taken as tax or legal advice. Content provided is intended as general information. Tax regulations and laws change and the impact of laws can vary. Consult a tax advisor, CPA or lawyer for guidance on your specific situation.