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Why Form W-4 Needs a Reboot

Jul 19th 2018
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Form W-4
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The National Association of Enrolled Agents (NAEA) minces no words in strongly recommending that the IRS revamp its new draft Form W-4 or else.

“If taxpayers and employers are forced to use Forms W-4 that are difficult to understand and require taxpayers to disclose personal information, we should expect unpleasant (or catastrophic) surprises in early 2020 when taxpayers determine the liabilities of their post-[tax-reform law] Form 1040,” said NAEA President Jean Nelsen in a recent letter to IRS Acting Commissioner David Kautter.

The IRS typically redesigns Form W-4 after a major overhaul of the Internal Revenue Code. But that generally means the agency will balance a complex yet more accurate form and a simpler yet less accurate version, Nelsen wrote. “In this instance, however, we are concerned the new form both increases complexity (by an order of magnitude) and, in many cases, decreases accuracy,” she states.

Nelsen also suggests that the IRS consider using tax professionals in developing commonly used forms, such as Form W-4. “The results matter,” she stated.

Here are the highlights of the NAEA’s four key critiques.

1. Overly long and complicated Form W-4 instructions and worksheets

Completing the proposed Form W-4 requires taxpayers to refer to 12 publications and forms. Those include Publications 524, 970, 968, 514, 590, 530, 502, and 5120 and Forms 3800, 8834, 8801, and 8859.

The NAEA questions if the forms are helpful to the average taxpayer. For someone trying to do pre-employment paperwork, “references to a dozen forms and pubs borders on the ludicrous,” Nelsen wrote.

The NAEA suggests that the IRS return to a design that gives points or exemptions based on questions that the average worker can handle. Such a method favors over-withholding to avoid penalties and unexpected tax balances due.

One solution would provide a balanced withholding between spouses instead of favoring the higher income spouse.

2. Forecasting tax-related items is tough

Particularly concerning to the NAEA are tax-deferred retirement plan contributions, scholarship and grant taxability, work-related child and dependent care expenses, tax year wages and bonus, other income from self-employment and nonwage income, medical and dental expenses, property taxes, and mortgage interest.

Some of those expenses and taxes typically aren’t known until the end of the year or are unevenly distributed throughout the year. And would employees actually want the bosses to know what they expect in bonuses and salary increases?

3. The draft W-4 requires taxpayers to calculate tax credit values

Wrongly estimating these credits – either over or under – will cause “wild swings” in withholdings that, in turn, will mean severe inaccuracies in employees’ withholding amounts, Nelsen states. If things get too complicated, employees likely will ignore the tax credits line on the form, “at their own peril,” she states.

4. The draft forces employers to take on a new burden in calculating withholdings

Small businesses typically don’t have human-resource and tax code knowhow, making the draft form especially burdensome and increasing the need for outside payroll services. But that’s not the extent of the NAEA concerns.

Other issues include privacy concerns about disclosing side jobs and a spouse’s income to employers and under-withholding risks because the IRS’s online withholding calculator can’t handle complex situations. 

As such, the NAEA makes these four recommendations:

  • The withholding calculator should be as simple as possible, prevent disclosure of personal and family information to employer, and err on the side of over-withholding
  • The IRS should consider going back to the traditional strategy of claiming a simple number of exemptions
  • The IRS should create one worksheet for all outside income that provides a more balanced withholding between two working spouses
  • For taxpayers who don’t provide enough information or if no amounts are entered, the form should offer a default warning that withholdings will be comparable to the current “Single with 1 exemption.”

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