W-4 Form

What is a 'W-4 Form'

An employee completes an IRS W-4 form, or an Employee's Withholding Allowance Certificate, to indicate his tax situation to the employer. The W-4 form tells the employer the correct amount of tax to withhold from an employee's paycheck based on the employee's marital status, number of exemptions and dependents and other factors.

A taxpayer can file a new W-4 any time his situation changes, such as when he marries, divorces or has a child or a dependent dies. A change in status can result in the employer withholding more or less tax.

BREAKING DOWN 'W-4 Form'

The employee fills out seven lines of the W-4 form. The first few lines include the taxpayer's name, address and Social Security number. The worksheet above the form lets the taxpayer estimate the amount of allowances on his tax withholding. Increasing the amount of allowances reduces the amount of money withheld from the paycheck. A person can claim an exemption from withholding any money if he did not have a tax liability during the previous year and expects to have zero tax liability in the next year.

Calculating Allowances

The worksheet starts by letting the taxpayer add one allowance if he cannot be claimed as a dependent on someone else's income tax return. The employee can take another allowance if he's single and has just one job, is married with one job and the spouse doesn't work, or has wages from a second job within the family totaling less than $1,500. He can take another allowance if his spouse doesn't work.

Dependents and Child Care

The employee adds the number of dependents into the withholding amount. Dependents are children, adult relatives who don't work or elderly people living with the taxpayer. The worker can take an allowance for filing as head of household if he is unmarried and makes more than 50 percent of the household's income.

A worker can claim one extra allowance if child care expenses are higher than $2,000 per year. At that point, he can claim a tax credit. Another allowance comes into play if a worker plans to use any child tax credits on an income tax return.

The employee adds together all of the allowances listed on the worksheet to get a total. He fills in the number of allowances in Line 5, and then he can designate any additional amount of money he may wish the employer to withhold from each paycheck.

What the Employer Does

The employer then calculates how much to withhold from a paycheck based on the allowances calculated on Form W-4. The money withheld goes to the Internal Revenue Service (IRS) after each paycheck.

When an employee files an income tax return each year, he may get back some of the money withheld in the form of a refund if the employer withheld too much money from his pay. If the employer withholds too little money , the taxpayer may owe the IRS additional money.