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Online Tax Withholding Estimator Revised by IRS

Online Tax Withholding Estimator Revised by IRS

The Tax Withholding Estimator, an online tool for employees to use to calculate the amount they want withheld from their pay for federal income tax purposes, has been updated by the IRS.

For several years, the IRS website had an online worksheet, the Tax Withholding Calculator, to calculate the amount that an employee wanted to be withheld from his or her paycheck. The Calculator was updated to reflect changes made by the Tax Cuts and Jobs Act for 2019.

Last year, the IRS replaced the Calculator with the Tax Withholding Estimator. If an adjustment is needed to an employee's paycheck withholding, the Tax Withholding Estimator (Estimator) gives specific recommendations on how to fill out their employer's online Form W-4, Employee's Withholding Certificate, or provides a PDF of Form W-4 with key parts filled out.

The Estimator can be found here.

The IRS has revised the Estimator to incorporate the changes from the redesigned Form W-4. See IRS FAQs on the final version of 2020 Form W-4.

To help workers more effectively adjust their withholding, the revised Estimator features a customized refund slider that allows users to choose the refund amount they prefer from a range of different refund amounts. The exact refund range shown is customized based on the tax information entered by that user.

Based on the refund amount selected, the Estimator gives the worker specific recommendations on how to fill out their W-4. This new feature allows users who seek either larger refunds at the end of the year or more money on their paychecks throughout the year to have just the right amount withheld to meet their preference.

The revised Estimator also features several other changes, including one allowing anyone who expects to receive a bonus to indicate whether tax will be withheld. In addition, features found in the Estimator as of last summer continue to be available, including mobile-friendly design, handling of pension income, Social Security benefits, and self-employment tax.

The IRS points out that, starting in 2020, income tax withholding is no longer based on an employee's marital status and withholding allowances, tied to the value of the personal exemption. Instead, income tax withholding is generally based on the worker's expected filing status and standard deduction for the year. In addition, workers can choose to have itemized deductions, the Child Tax Credit, and other tax benefits reflected in their withholding for the year.

The IRS emphasizes that it is important for people with more than one job at a time (including families in which both spouses work) to adjust their withholding to avoid having too little withheld. As in the past, employees can also choose to have an employer withhold an additional flat-dollar amount each pay period to cover, for example, income they receive from the gig economy, self-employment, or other sources that is not subject to withholding.