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. Beginning Jan. 1, 2018, personal exemptions are suspended (not allowed) until Jan. 1, 2026. The IRS will issue new guidance about withholding in January 2018, effective February 2018. 

"We anticipate issuing the initial withholding guidance in January, and employers and payroll service providers will be encouraged to implement the changes in February. The IRS emphasizes this information will be designed to work with the existing Forms W-4 that employees have already filed, and no further action by taxpayers is needed at this time," it said in a Dec. 26, 2017, statement.

Taxpayers can file a new W-4 any time their situation changes, such as when they marry, divorce or have a child, or when a dependent dies. A change in status can result in the employer withholding more or less tax.

BREAKING DOWN 'W-4 Form'

The following information is based on the W-4 Form as it currently exists, in early January 2018. It is not clear how or whether the form will change due to the suspension of the personal exemption. If you are employed, it will probably be worth examining whether you will need to revise your current W-4 form in light of the new tax legislation to make sure you don't end up owing taxes at the end of the year.

The employee fills out seven lines of the W-4 form. (The 2018 draft version on the IRS website has the same number of lines and looks virtually identical.) The first few lines include the taxpayer's name, address and Social Security number. The worksheet above the form lets the taxpayer estimate the number of allowances on his tax withholding. Increasing the number 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 liability during the previous year and expects to have zero tax liability in the next year.

Calculating Allowances

The worksheet starts by letting taxpayers add one allowance if they cannot be claimed as a dependent on someone else's income tax return. Employees can take another allowance if they are single and have just one job, are married with one job and the spouse doesn't work, or have wages from a second job within the family totaling less than $1,500. They can take another allowance if their spouse doesn't work.

Dependents and Childcare

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 or she is unmarried and makes more than 50% of the household's income.

Workers can claim one extra allowance if childcare expenses are higher than $2,000 per year. At that point, they 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 the allowances listed on the worksheet to get a total. He or she fills in the number of allowances in Line 5, and then can designate any additional amount of money he or she wants 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.

RELATED TERMS
  1. Retention Tax

    A retention tax is any tax withheld from an employee's paycheck ...
  2. Excess Employer Withholding

    Excess Employer Withholding is extra money that has been withheld ...
  3. IRS Publication 15 - Employer's ...

    The IRS Publication 15- Employer’s Tax Guide is published by ...
  4. Taxpayer

    A taxpayer is an individual or business entity that is obligated ...
  5. Payroll Deduction Plan

    A payroll deduction plan refers to when an employer withholds ...
  6. Tax Return

    A tax return is a form(s) filed with a taxing authority on which ...
Related Articles
  1. Taxes

    The Purpose Of The IRS W-4 Form

    Why do you need to fill out a W-4 form and what does the IRS do with it?
  2. Taxes

    How to Fill Out Your W-4 Form

    Here's a step-by-step guide to making sure your employer reports your tax withholding correctly to the IRS.
  3. Personal Finance

    Coming Soon: A Bigger Paycheck

    Changes are coming to your paycheck in 2018. The 2017 tax bill will likely result in lower withholding amounts and more money in your pocket.
  4. Taxes

    Understanding The U.S. Tax Withholding System

    Understanding the origins of our tax withholding system is crucial to getting the most out of it.
  5. Retirement

    Employers: Don't Forget IRS Form 941

    Use Form 941 to report employment taxes on your business.
  6. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  7. Taxes

    The Purpose Of 1099 Forms

    The need for 1099 forms and why you must track the income reported on them. If you don't, the IRS will find it anyway and go after you – a costly mistake.
  8. Managing Wealth

    Hire Your Kids at Your Small Business – Here's Why

    And how to make sure you do it the right way, following IRS guidelines.
  9. Taxes

    Why People Don't Lie On Their Tax Returns

    Studies show people are overwhelmingly truthful when it comes to their tax filing, even when lying would benefit them.
  10. Personal Finance

    New Baby, New Tax Break

    Delivering a new baby also delivers a $1,000 child tax credit - and that's just the start!
RELATED FAQS
  1. What's the difference between short-term investments and marketable securities?

    Read about withholding taxes, how they work, and why there are both federal and state withholding lines on the typical American's ... Read Answer >>
  2. What is the difference between a single and a married withholding tax?

    Find out how the withholding tax differs for married and single individuals, including examples of how the income tax rate ... Read Answer >>
Trading Center