How to Adjust Your Tax Withholdings Using the New W-4

Working in the entertainment industry is not for the faint of heart. It requires a dedicated work ethic and entrepreneurial mindset to consistently navigate the gig-lifestyle. Coupling this fact with the 2020 pandemic, it can be tough for many entertainment professionals to plan for tax season.

Here at Entertainment Partners, we realize the challenges of living by an unpredictable work schedule, and want to equip you with as much financial know-how as possible, so you can worry less and focus more on your next project.

Getting Familiar with the New W-4

One of the unknowns that may be stumping you is the new W-4 form. It was released in December 2019, just before COVID-19 put a halt on film production, and probably impacted your 2020 taxes.

This new form offers employees four ways to change their withholdings, depending on how much they work throughout the year: 

• Line 3 reduces the amount of tax withheld
• Line 4(c) increases the amount of tax withheld
• Line 4(a) increases the amount of income subject to withholding
• Line 4(b) decreases the amount of income subject to withholding

To ensure that you get the best refund, or even just a tax break, first get your accurate numbers by using the online IRS Withholding Estimator a couple of times a year, and adjust your W-4 as your earnings fluctuate. Once you have your numbers, then you can plug them into the form.

Pro tip: Use our handy Guide to the New W4 for a visual reference as we discuss these lines in more detail below.

Adjusting Your Withholdings

Now that you're ready to put the form to use, here’s an overview of how your numbers could work on the form:

The four possibilities for adjusting your withholdings are all related and could be reduced to one net figure. For example, lines 4(a) and 4(b) work in opposite directions, so the amounts could be combined into one net amount of additional income or reduction to income.  Similarly, lines 3 and 4(c) could be combined into one net amount, depending on how you decide to increase or decrease the amount of tax withholding. 

Moreover, the net amount of income adjustment from lines 4(a) and 4(b) could be translated into the corresponding amount of tax adjustment (depending on the employee’s tax bracket, etc.), then combined with the net amount from lines 3 and 4(c) to determine the bottom-line amount by which to increase or decrease your withholding—just one number.  

While this may sound a bit complicated, don’t worry, that’s when the handy online Tax Withholding Estimator can help! 

On the W-4, lines 3, 4a, 4b, and 4c are left separate so that employees don’t have to do the math to get to the bottom line (i.e., how much to increase or decrease withholding). Rather, the payroll system of their employer is left to do the math. However, as the Form W-4 instructions indicate, many employees may find it advantageous to use the online Tax Withholding Estimator ahead of time, so that they don’t have to reveal as much about their family or finances to their employer.

The most common reason to populate line 3 is to claim child related credits, but it can be used for other credits like mortgage interest and charitable contributions. Tax credits reduce your tax obligation dollar-for-dollar, so entering an amount on line 3 will reduce your withholding by that amount over the course of a year. Line 3 can also be used to reduce your withholding when you have already had too much withheld in a year. In fact, the Tax Withholding Estimator also uses line 3 to account for all deductions and adjustments to income that would otherwise be accounted for on Line 4(b)! This allows you to limit the amount of information you need to provide your employer on Form W-4, protecting your privacy.

To get started on next year’s taxes, be sure to explore the online Tax Estimator Tool to see how your numbers shape up, and for continued education, check out the Beginner’s Guide to Federal Tax Withholding so you can plan ahead. 

Making movies isn’t an easy business, but it is rewarding. And together with my team here at Entertainment Partners, we want to help you live out your creative dream in the most financially savvy way possible!

For additional information on how we can guide your production to financial success, reach out and connect with an Entertainment Partner expert today.