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.
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.