| Update Applicable to: | Effective Date |
| All Employers | See Details Below |
What happened?
On August 21, 2025, the Internal Revenue Service (IRS) released a draft of the 2026 Form W-4, introducing several key changes that reflect updates made under the OBBBA and the permanent provisions of the Tax Cuts and Jobs Act (TCJA).
Overview:
While the draft is not final and cannot be used for filing, it offers a clear preview of the direction the IRS is taking with federal income tax withholding.
Who Should Pay Attention
Tipped employees and those with regular overtime: Can now adjust withholding more accurately.
Recent car buyers: May benefit from the new car loan interest deduction.
Older workers (65+): Can factor in the senior deduction to avoid over-withholding.
For Employers
Payroll Systems: Prepare to accommodate new fields for tips, overtime, car loan interest, senior deductions, and the exempt checkbox.
Employee Guidance: Update onboarding materials to reflect the new layout and withholding options.
Additional Information:
Changes in the Draft 2026 Form W-4
Expanded Deductions in Step 4(b):
The Deductions Worksheet now includes specific lines for:
Qualified tip income (up to $25,000).
Overtime compensation (up to $12,500 for individuals, $25,000 for married couples).
New car loan interest (up to $10,000).
Additional deduction for seniors (age 65+): $6,000 per person.
These deductions apply to tax years 2025 through 2028.
New “Exempt from Withholding” Checkbox:
Replaces the handwritten “Exempt” with a formal checkbox and certification language.
Includes a reminder to submit a new W-4 the following year.
Refactored Credits Section (Step 3):
Split into:
Step 3(a): Qualifying children under 17 (placeholder amount)
Step 3(b): Other dependents ($500)
Placeholder values suggest final amounts will be set closer to tax season.
Adjustments for TCJA Permanency: The draft reflects permanent changes including:
Increased standard deductions
Reinstated personal exemptions
Updated Child Tax Credit structure
Source References
Resources
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