• Christine Centeno, CFPⓇ

Do you have stock compensation? Here’s what you need to know about the updated IRS Form W-4.


Here’s a quick guide to the IRS Form W-4 including what you need to know about the 2020 changes.


What is Form W-4?


IRS Form W-4, also known as the Employee’s Withholding Certificate, tells your employer how much federal tax to withhold from your paycheck. In other words, it directly impacts your take-home pay. The portion of tax withheld from your paycheck is sent to the IRS and goes towards your tax due that year.


Generally, you’ll be asked to complete this form when you start a new job. Unless advised by your CPA to make changes, you probably won’t come across it all that often. If you work more than one job, you’ll have a W-4 on file with each employer. Once this form is on file with your employer you are only required to update it when you want to make changes to the amount of tax withheld from your paycheck. People typically make changes when they change filing status or have a major life event (think a change in income, the birth of a child, divorce or death).


What changes were made in 2020?


The IRS has an updated W-4 this year. The form was redesigned following the Tax Cuts and Jobs Act of 2017 which took effect in 2018. In an effort to simplify the form and make it easier to complete, the new form no longer asks you to complete the number of allowances but instead takes into consideration your income from all sources as well as your dependents. The new W-4 considers income from sources where taxes are not withheld, like retirement or dividends and interest. It also asks about deductions outside of the standard deduction you expect to take.


If you have a W-4 on file with your employer, you don’t have to make any updates as a result of the form redesign. However, this could be a good time to revisit, especially if you receive additional sources of income like stock compensation or you’ve been with your employer for a while and haven’t recently reviewed your withholding.


How does it relate to your stock compensation income?


As a recipient of stock compensation, your tax picture has most likely become more complex.


Form W-4 tells your employer how much federal tax to withhold from your paycheck. However, this form applies to your salary only. This is an important distinction for those that receive compensation in addition to their salaries like Restricted Stock Units (RSUs) or Non-Qualified Stock Options (NQSOs). Compensation via RSUs and NQSOs are subject to the federal supplemental withholding rate of 22% (37% for supplemental compensation over $1million). For some, this isn’t enough and changes need to be made to increase tax withholding and prevent a big surprise at tax time.


Fortunately, some additional changes can be made using the new W-4 form. The new W-4 still has a section for extra withholding located in section 4. This is used if you want additional tax withheld each pay period and could be used after a taxable stock compensation event where the normal withholding wasn’t enough.


The new addition allowing other income to be listed could be helpful if you expect to receive other income that is not taxable. For those with stock compensation, W-4 may not completely prevent under-withholding. In that case, it might be time to consult your tax advisor and consider making quarterly estimated payments to the IRS.


Resources


If you want to revisit your W-4 this year, the IRS offers a helpful tool called the Tax Withholding Estimator. You’ll want to make sure that you have your most recent pay stubs, tax return and information on any other income sources handy when using the estimator. Answers to general questions on the new W-4 can be found in the IRS FAQ. Some situations can be especially complex when it comes to stock compensation and you will need to consult your tax advisor or CPA for additional assistance.


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Christine Centeno, CFPⓇ, MS is the founder of Simplicity Wealth Management. She has over 12 years of industry experience as a financial advisor and is a member of several professional organizations including NAPFA, FPA, and the XY Planning Network. She also holds her Masters in Financial Planning. In 2019, after years of working for large firms, she founded her own firm. Simplicity Wealth Management provides clarity to the complicated nature of financial planning and investing by delivering comprehensive advice without hidden fees and unnecessary jargon that leaves you in the dark. The goal is to deliver transparent, easy-to-understand guidance to help clients achieve their financial goals and remain informed every step of the way.



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Christine A. Centeno, CFP, MS

Simplicity Wealth Management, LLC

2400 Old Brick Rd. Suite C35

Glen Allen, VA 23060

(804) 286-4910

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