As part of the process of starting a new job, your employer will likely ask you to fill out a whole mess of forms. Some they will fill out for you (unless they are not super into the law, and obeying the law, and whatnot. In which case they won’t). But if they are law-abiding, then one of these forms will be the W-4 Form (aka the “Employee’s Withholding Allowance Certificate”), and it is all about how much tax your boss will withhold from your paycheck. The precise amount withheld here will all depend on how this form is filled out, so here are all the important details that you should know.
Why the W-4 form is important
The IRS can be an exacting organization. One thing that they are very picky about is that we, their faithful servants, should pay our taxes not in one lump sum but gradually throughout the year. If you fill out the W-4 wrong, you might end up having too few taxes withheld. This would result in you having to pay an exorbitant amount come April, which would really suck. And that’s aside from the interest. Oh yeah, and a penalty for paying too few taxes.
But wait. There’s more! If you end up withholding too much, then you are going to be working with a woefully tight monthly budget, and nobody wants that. If you withhold too much, you are basically loaning the federal government money with no strings attached. (Save those loans for friends who have hit rock bottom!) With that money, you could be saving or investing, or earning a return. Let’s also talk about human nature for a second. You will not receive these overpaid taxes back until the following April, and, let’s be honest with ourselves, that unbelievable abrupt windfall of cash will probably be so seductive that there’s little chance you’ll use it wisely. You’re gonna let it rain, and you know it.
Better to pay those taxes gradually for sure. By the way, if you don’t submit a W-4 form at all, then the IRS requires your employer to withhold at the highest rate, even if you are not single, or have allowances to claim.
Let’s calculate your allowances
The W-4 form comes with a fun little Personal Allowance Worksheet that can help you figure out how many allowances you should claim, and, based on how you answer the provided questions, your employer will figure out how much of your paycheck to withhold. Here are how allowances are calculated on this worksheet:
- You can claim one allowance if no one else claims you as a dependent (which is the case for most adults).
- You can claim a second allowance
- if you are single and have only one job
- if you are married but your spouse doesn’t work
- if your wages from a second job or a spouse’s job are $1,500 or less.
The IRS allows us to claim an allowance if you have a spouse, as well as an allowance for each dependent that you will be claiming on your tax return. There is also an allowance if you marked your tax-filing status as “head of household.” Child and dependent care are also available allowances to claim on your W-4 form.
* If your tax situation is more complicated, there is an additional page for you. For instance, maybe you have more than one job, or your spouse works. You might itemize deductions on your tax return instead of taking the standard deduction, in which case you might need to get a little bit more specific.
Basically, the more allowances you claim on your W-4, the less your employer will withhold from your paycheck. And, you guessed it, the fewer you claim, the more your employer will withhold on your paycheck. As a note, you can use the W-4 Form to prevent your employer from withholding any money at all. But that is only the case if you are legally exempt from withholding due to having had no tax liability the previous year and expect to have no tax liability for the current year.
You might consider filing a new W-4 if…
When your employer is done with the W-4, they do not send it to the IRS. The company you work for keeps records, and they file all their employees’ W-4s away for future reference. But because our life situations change all the time, it sometimes becomes necessary or optimal to amend your W-4. If you have recently gotten married or divorced, for instance, then you should file a new W-4 form. Having a new child (hopefully birthed, not stolen…) or having picked up a second job are two reasons to file a brand new W-4. If you withheld too much or too little last year, and you expect your financial circumstances will be the same, or very similar, for this tax year, then you might consider filing a new W-4 as well. After all, why make the same mistake twice?
A free tip!
If you were unemployed for the beginning of the year but then found yourself a job toward the middle of the year, then there are certain things you can do with your W-4. Certain money-saving things, to be more specific: If you request, in writing, that your employer use the “part-year” method to compute your withholdings (because the “basic withholding” formula assumes that you have been employed for the full year) then you can avoid withholding too much and thus you won’t have to wait until tax-time to get your money back.
* You can only have worked a maximum of 245 days out of the year to classify as “part-year employment.”
While this is hardly unique to the W-4 form (it applies to all tax-related matters), it still merits being said: Be careful! Depending on how you fill out this form, you may end up withholding too much or too little. Both of those extremes come with plenty of annoyances that you’ll be forced to deal with for the year. In other words, to land in that comfy middle area of not-too-much and not-too-few withholdings, you have to be very precise with how you calculate your withholding property (I feel like I should have made a Goldilocks reference there…). Your earnings are at stake!
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