When you get a new job, one of the many pieces of paper your employer will ask you to complete is IRS form W-4, Employee's Withholding Allowance Certificate. The way you fill out this form 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.
Why the W-4 Is Important
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 don't withhold enough tax, 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 withhold too much tax, your monthly budget will be tighter than it needs to be. In addition, 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.
Figuring Your Allowances
IRS form W-4 comes with a Personal Allowances Worksheet to help you figure out how many allowances to claim. Answering the worksheet’s questions creates a broad picture of your tax situation that will allow your employer to withhold the correct amount of money from your paycheck. You can claim one allowance if no one else claims you as a dependent (which is the case for most adults). You can claim another 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 a spouse’s job are $1,500 or less.
In other words, you’re claiming a second allowance if your household only has one major income source. You can also claim one allowance if you have a spouse, one allowance for each dependent you will claim on your tax return and one allowance if your tax-filing status is head of household. Finally, you can claim allowances for child and dependent care.
The worksheet 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. IRS Publication 505, "Tax Withholding and Estimated Tax," provides additional information on how to complete form W-4 if you’re having trouble. Keep the worksheets for your records; your employer does not need them.
The more allowances you claim on form W-4, the less your employer will withhold from your paycheck. The fewer you claim, the more your employer will withhold. You can also use form W-4 to request additional money be withheld from each paycheck, which you should do if you expect to owe more in taxes than your employer would normally withhold based on the number of allowances you are claiming.
One situation where you might ask your employer to withhold an additional sum is if you earn self-employment income on the side and want to avoid making separate estimated tax payments for that income. You can also use form W-4 to prevent your employer from withholding any money at all from your paycheck, but only if you are legally exempt from withholding because you had no tax liability for the previous year and you also expect to have no tax liability for the current year.
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 requiring a change to 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 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.
The Bottom Line
Take the time to calculate your withholding properly. You'll avoid having to pay penalties at tax time and will keep as much of your earnings as legally possible.
For more information, see Filling Out Your W-4 Form.