You’ve just started a new job, and you’re feeling pretty fantastic about it. Then your employer gives you a tax form called a W-4 to fill out. Tax forms fill you with dread. You don’t understand them, and you’re afraid of what will happen if you make a mistake. Don’t worry: This article will explain what a W-4 is and line by line and how to complete Form W-4, Employee’s Withholding Allowance Certificate so that your employer will withhold the correct amount of income tax from your paychecks. (If you have an accountant, confirm your decisions with him or her before you turn in the form.)
What is the W4 Form
The way you fill out IRS form W-4, Employee's Withholding Allowance Certificate determines how much tax your employer will withhold from your paycheck. Your employer sends the money it withholds from your paycheck to the Internal Revenue Service (IRS), along with your name and Social Security number. Your withholding counts toward paying the annual income tax bill you calculate when you file your tax return in April. That’s why form W-4 asks for identifying information, such as your name, address, and Social Security number.
Provide your name and address in section 1. Easy.
Provide your Social Security number in box 2. Your employer needs this information so that when it sends the money it has withheld from your paycheck to the IRS, the payment is applied toward your annual income tax bill.
In box 3, check the box that corresponds to your marital status, single or married. But wait, there’s another box: “Married, but withhold at higher Single rate.” Should you choose this box? Possibly, if your spouse also works, and you’re worried about not having enough tax withheld. Before you decide, check out the Two Earners/Multiple Jobs Worksheet (it’s the second page your employer should have given you with Form W-4, or you can download it from the IRS). There’s also a note below the boxes instructing you to choose the “Single” box if you are married but legally separated, or if your spouse is a nonresident alien.
Box 4 probably won’t apply to you unless you’ve recently gotten married and changed your name but you still haven't gotten an updated Social Security card reflecting the name change. You have to call 1-800-772-1213 for a replacement Social Security card with your new name on it before you can give a W-4 to your employer. It’s not that big a deal but do it quickly, because your employer is required to withhold taxes at the highest possible rate until you submit a W-4.
Line 5 asks for the total number of allowances you are claiming. To respond, you have to answer a few questions.
First, look at the upper part of the page on the W-4 that you’re filling out. There, you’ll find the Personal Allowances Worksheet. Each allowance you claim reduces the amount your employer will withhold from your paycheck, but you can’t just choose a high number of allowances because you feel like it. Filling out this worksheet will tell you how many allowances you are allowed to enter on line 5. Let’s go through each step.
A. Claim one allowance if no one else claims you as a dependent, which is the case for most adults. But if, say, you’re 16-years-old and filling out Form W-4 for your after-school job, or you’re in college and filling out the form for your summer internship, your parents probably claim you as a dependent, and you aren't allowed to claim an allowance here.
B. You can claim a second allowance if you are single and have only one job, if you are married but your spouse doesn’t work, or if your wages from a second job or your spouse earns $1,500 or less. Basically, if your household only has one significant source of income (the job for which you're filling out this W-4), claim an allowance on this line.
C. Claim one allowance if you have a spouse. But if you have more than one job, or if you’re married and your spouse works, you might not want to claim an allowance here to avoid having too little tax withheld.
D. Do you have any dependents "other than your spouse or yourself" whom you will claim on your tax return? Technically, the IRS definition of a dependent is pretty complicated (see IRS publication 501 for details), but the short answer is that it’s a qualifying child or qualifying relative who lives with you and whom you support financially.
E. Claim one allowance if you will file as the head of your household. You might think, as I once did, that if you are single and independent, you are the head of your household. The IRS would beg to differ. It considers a head of household to be someone who is unmarried (at least I got that part right) and pays more than 50% of the cost of keeping up a home for himself or herself and his/her dependent(s) or other qualifying individuals (again, Publication 501 has all the details). This is more of a “sorry you got stuck raising that kid by yourself” allowance.
F. Claim one allowance if you have at least $2,000 of child- or dependent-care expenses (excluding child support) for which you plan to claim a credit on your annual income tax return. See IRS publication 503, "Child and Dependent Care Expenses," for details.
G. Child Tax Credit (including additional child tax credit). On this line, you can claim allowances for your eligible children, depending on your income and how many children you have. See IRS publication 972, "Child Tax Credit," for more information. Basically, all of these questions about children and dependents are trying to account for any credits you’ll be able to claim on Form 1040 that will reduce your income tax for the year. Your employer will withhold less from your paychecks if any of these situations apply to you.
H. Finally, an easy question. Add up all the numbers from the lines above and enter the total here.
Below line H, you’ll learn that you might not really be done with the worksheet yet. It has additional pages if your tax situation is more complicated because you have more than one job, your spouse works, or you itemize deductions on your tax return instead of taking the standard deduction. Walking through these additional worksheets is beyond the scope of this article, but IRS publication 505, "Tax Withholding and Estimated Tax," provides additional information. The IRS Withholding Calculator might save you some time.
Assuming you don’t fall into one of these more complicated situations, however, transfer the total from line H of the worksheet to line 5 of Form W-4, below, where you left off. Keep the worksheets for your records; don’t give them to your employer.
Remember, we’re back on Form W-4 now. The IRS wants to know if you want an additional amount withheld from your paycheck. “Of course not. You’re taking enough of my money already,” you think. But if the number of allowances you’re claiming on line H is likely to result in your employer withholding too little tax over the course of the year, you’ll end up with a big tax bill and possibly underpayment penalties and interest in April. In that case, tell your employer to withhold extra money from each paycheck, so that doesn’t happen.
How do you know if this might happen? One likely cause is if you receive significant income reported on Form 1099, which is used for interest, dividends or self-employment income; no income tax is withheld from these sources of income. You also might need to enter an amount for line 6 if you had to use the second page of the personal allowances worksheet.
Are you legally exempt from withholding because you had no tax liability for the previous year and you expect to have no tax liability for the current year? If so, write “exempt” in box 7. Notice that the instructions do not say to write “exempt” if you received a tax refund last year. That’s not the same thing as having no tax liability. Having no tax liability might sound awesome, but it probably means you made less than $15,000 for the entire year if you’re single, or that you and your spouse made less than $30,000 if you’re married filing jointly.
Remember how we said earlier that you couldn’t just claim as many exemptions as you felt like? Here’s why. The form says, “Under penalties of perjury, I declare that I have examined this certificate and, to the best of my knowledge and belief, it is true, correct, and complete.” You have to sign your name below that statement, where it says, “Employee’s signature.” Then enter the date to the right.
Finally, follow the instructions about two-thirds of the way down the page that say, “Separate here and give Form W-4 to your employer. Keep the top part for your records.”
When You Need to File a New Form
In general, your employer will not send form W-4 to the IRS; after using it to determine your withholding, the company will file it. You can change your withholding at any time by submitting a new W-4 to your employer. Situations when you might need to change your W-4 include getting married or divorced, having a child or picking up a second job. You might also want to submit a new W-4 if you discover that you withheld too much or too little the previous year when you're preparing your annual tax return—and you expect your circumstances to be similar for the current tax year. Your W-4 changes will take effect within the next one to three pay periods.
If you start a job in the middle of the year and were not employed earlier that year, here's a tax wrinkle that can save you money. If you will be employed no more than 245 days for the year, request in writing that your employer uses the part-year method to compute your withholding. The basic withholding formula assumes full-year employment, so without using the part-year method, you’ll have too much withheld, and you’ll have to wait until tax time to get the money back.
The Bottom Line
It’s important to complete this form correctly because the IRS requires people to pay taxes on their income gradually throughout the year. If you have too little tax withheld, you could owe a surprisingly large sum to the IRS in April, plus interest and penalties for underpaying your taxes during the year. At the same time, if you have too much tax withheld, your monthly budget will be tighter than it needs to be. Also, you’ll be giving the government an interest-free loan when you could be saving or investing that extra money and earning a return – and you won’t get your overpaid taxes back until the following April when you file your tax return and get a refund. At that point, the money may feel like a windfall, and you might use it less wisely than you would have if it had come in gradually with each paycheck. If you don’t submit form W-4 at all, the IRS requires your employer to withhold at the highest rate, as if you were single and claiming no allowances.