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, 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 or another tax preparer, confirm your decisions with him or her before you turn in the form.)
Also note that the new tax bill, signed in Dec. 2017, has eliminated the personal exemption. Depending on the deductions you expect, this is a reason to revisit the number of allowances you have claimed in the past before you fill in the same number on Line 5 (allowances).
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.
The W-4 form has seven sections to fill out. The first few lines include the taxpayer's name, address, and Social Security number. The worksheet above the form lets taxpayers estimate the number of allowances for their tax withholding. Increasing the number of allowances reduces the amount of money withheld from your paycheck. People can claim an exemption from withholding any money if they did not owe tax during the previous year and expect to have zero tax liability in the next year.
Here's how completing the form works.
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 a 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 fourth 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 your 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 page three of the W-4 package 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 one allowance if you're married filing jointly.
C. Or, you can claim one if you're filing as head of 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.
D. You can claim a second allowance if you are single or married filing separately and have only one job; if you are married filing jointly and have only one job and your spouse doesn’t work; or if your wages from your or a spouse's second job (or both second jobs) are $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.
E. On this line, you can claim allowances for each of your eligible children, depending on your income and how many children you have. 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. The new tax legislation doubled the Child Tax Credit and eliminated a tax break called the Additional Child Tax Credit until the end of 2025 (however, some elements were worked into the 2018 child tax credit). It also increased how much parents can earn and still take credits for their children. Lower-income families get more, but you can be married filing jointly and earn up to $400,000 and still claim something (the maximum to get the credit in 2017 was $119,000).
F. Here's where you enter allowances for other dependents 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. There are income limitations here, too. Individuals with incomes of $175,550 and up or those married filing jointly earning $339,000 or more need not apply.
G. If you're taking certain other credits for 2018, such as the earned income credit or an adoption tax credit, you may be entitled to additional allowances. Look at Worksheets 1-6 in IRS Publication 505.
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. What a bummer. 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, 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 (the IRS enacted a one-time penalty waiver for those who paid 85 percent of their total tax liability in 2018 to account for individuals who weren't able to adjust to the 2017 tax reform; the normal threshold is 90 percent). 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 might also need to use it if you're still working but receive pension benefits from a previous job. And if your spouse is an employee but you're an independent contractor, you can have extra money withheld from their paycheck so that your quarterly estimated tax payments aren't as big. This decision can even out your household's cash flow.
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. That's not so awesome unless someone else (like Mom or Dad) is happily supporting you.
Remember how we said earlier that you couldn’t just claim as many allowances 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 W-4
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, adding a child to your family 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.
Also, as noted earlier, discuss the new W-4 with your tax preparer and see whether you should change your withholding because of how the new tax legislation affects your personal situation.
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 use 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.
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.
Also note: 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.