When you start a new job or experience a major life change, your employer will give you a tax Form W-4 to fill out.
Clients often ask how they should complete the form and how many allowances they should claim on the form, so in today’s post, I’ll offer some tips for completing Form W-4, including how allowances are now calculated.
What’s the point of a Form W-4?
The Form W-4 helps determine how much federal income tax your employer will withhold from each of your paychecks. It’s important to fill out this form correctly so that you don’t end up owing money at the end of the year or getting a smaller refund than you expected.
How many allowances should I claim on my Form W-4?
Prior to recent tax reform, one of the key decisions to make when completing a Form W-4 was determining how many allowances to claim. Put simply, an allowance was a term used by the IRS to describe the amount of money you could earn without having to pay income tax. Each allowance you claimed reduced the amount of income that was subject to federal income tax withholding.
Some clients who remember the old Form W-4 will still ask me about “claiming 1” or “claiming 0” on the Form W-4, but that no longer applies. Instead of claiming allowances, the current Form W-4 (starting in 2020) uses other methods to determine how much money your employer will withhold from each of your paychecks.
How do I complete a Form W-4?
Let’s take a closer look at the information you’ll provide in each section of your Form W-4.
Step 1: Enter Personal Information and Filing Status
You’ll start by simply entering the personal information that is requested. Then, there are five filing statuses that you can choose from:
- Single: You are unmarried and have no dependents.
- Married filing separately: You are married but file a separate tax return from your spouse.
- Married filing jointly: You are married and file a joint tax return with your spouse.
- Qualifying surviving spouse: Your spouse died in the previous tax year, you have a dependent child, and you did not remarry.
- Head of household: You are unmarried, have at least one dependent, and pay more than half the cost of keeping up a home.
The filing status you choose will affect your tax rate and the amount of standard deduction you can claim. If you are unsure which filing status to choose, the IRS has a tool called the Interactive Tax Assistant that can help you determine the correct status.
Step 2: Estimate Your Income
You’ll complete this portion of your Form W-4 if you have more than one job or if you are married filing jointly and your spouse has a job. If either of those apply to you, then you’ll do one of the following:
- Use the Multiple Jobs Worksheet on page 3 of the Form W-4 to calculate the total federal tax that should be withheld from all of your jobs (or yours and your spouse’s job). You’ll only want to do this if you’re trying to use one Form W-4. Tip: You should submit this to your highest paying job and resubmit any Form W-4s you or your spouse already submitted to your other jobs.
- If you have two jobs, or if you and your spouse only have two jobs between you, and your yearly income at one of the jobs is more than half your yearly income at the higher paying job, then you can check the box under Step 2(c) on the Form W-4 for both jobs. Tip: If you’re bringing in a similar amount of money from each job, then this would probably be the right choice for you.
Remember that if you have self-employment income and want the taxes you’ll pay on that income to be deducted from the wages at the job for which you’re completing the Form W-4, then you can add that in Step 4(a) of the form.
Step 3: Determine the Number of Dependents You Have
Entering the number of dependents on the form is similar to how we used to claim allowances on the old Form W-4. However, the new form simplifies things by breaking down dependents into two categories:
- Qualifying dependents under age 17, or
- Other dependents, which may include elderly parents or others that you support financially.
It’s important to note that if your spouse has claimed and calculated for these dependents on their Form W-2, then this may result in not having enough withheld and instead having to pay a tax bill at the end of the year. Typically, married couples will claim dependents and other tax credits only on the Form W-4 for their highest paying job.
Step 4: Enter Other Adjustments
In this portion of your Form W-4, you can account for any other income, deductions, or withholdings you may know of that would affect the amount you want withheld from your paychecks.
If you are exempt from withholding because you didn’t owe any federal tax in the previous year and you expect to not owe any federal tax in the current year, you can write the word “Exempt” on Step 4(c) to indicate you shouldn’t have any withholding.
Step 5: Sign and Date
All that’s left to do now is sign and date your form and turn it in to your employer (but don’t forget to complete step 6!).
Step 6: Check Your Withholding
After everything has been submitted and you’ve received a paycheck for a full pay period, it’s time to check and see if everything looks good. You can use the IRS Tax Withholding Estimator tool to make sure you’re on the right track.
The tool will ask you a series of questions about your income, filing status, and deductions to help you determine if the correct amount is being withheld. This is important because if too much is being withheld, you’re allowing the government to keep your money until you get a refund when filing taxes (which means you can’t use it how you want). And if too little is being withheld, then you’ll have a tax bill at the end of the year. You may even have to pay interest and penalties on the amount you owe.
Can I submit another Form W-4?
If you find that you need to make adjustments to your Form W-4, you can ask your employer for a new one or print one out yourself, correct the form, and resubmit. This can be done at any time throughout the year.
You should definitely complete another Form W-4 if you have a significant life change that will affect your taxes. This could include having a child, getting married, or getting divorced. If you have a spouse that starts a new job, that would also be a good time to reevaluate your Form W-4.
Tax forms can be confusing, but completing the Form W-4 correctly is an important step in ensuring that you won’t owe the tax man too much at the end of the year. If you have questions about your specific tax situation, you should consult a CPA who can verify that you’re on target.