What Is a W-4?

A Form W-4 is otherwise known as the Employee’s Withholding Allowance Certificate. It’s an Internal Revenue Service (IRS) document completed by an employee to indicate his or her tax situation to the employer. By selecting certain details such as allowances, exemptions, and status, the W-4 tells the employer the correct amount of tax to withhold from an employee’s paycheck.

What Is the Difference Between a W-2 and W-4?

Form W-4 and W-2 are two related IRS documents that are easy to confuse due to the similarity of their names. They both relate to an employee’s tax situation, but serve different functions. A Form W-2 is provided to employees and the IRS by their employer at the end of every year. This document contains relevant information necessary for an individual’s tax return, such the total amount of wages earned, federal and state taxes withheld, and contributions to Social Security for a given tax year. The employee will then submit this information when paying taxes in April with their Form 1040.

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In contrast, a W-4 is filed by an employee whenever he or she begins a new job. The form is provided by an employer and used to calculate the correct amount of Federal income tax to withhold from the individual’s paycheck. Individuals will fill out the Personal Allowances Worksheet found within the document to determine how many allowances to claim on the W-4. The number of allowances corresponds to how much money will be deducted from your paycheck and applied to taxes; the more allowances an employee claims, the less money the employer withholds for tax purposes. Note that W-4 forms are typically not sent to the IRS, but rather used by employers. Employers should refer to the Community Tax consulting services for accounting, tax planning and other relevant business matters.

 

Who Should File a W-4?

A Form W-4 is required of all employees earning at least $800 per year. An employee can claim an exemption on a W-4 only if they are over the age of 65, blind, or will claim adjustments to income. You can’t claim an exemption if someone else claims you as a dependent on his or her tax return, or if your income exceeds $1,050 and includes more than $350 of unearned income (most commonly, interest and dividends). Employers are required to provide the Form W-4 to each new hire at the beginning of employment. An employee can also update his or her W-4 at any time based on changes in personal or financial situations. Employers are under no obligation to request updates on their employees’ W-4 forms. For this reason, the IRS suggests employees fill out a new W-4 each year to account for any life changes. There are specialized W-4 forms for other types of payments; for example, Form W-4P is used for pensions while W-4V is used for government payments such as unemployment.

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How Much Should I Withhold?

Withholding depends entirely on one’s personal situation, but ideally should equal the annual tax due on Form 1040. When determining how much to withhold from your paycheck, you must consider a number of factors including, but not limited to, family situation (marital status, number of children), homeownership (buying or selling a home), and saving contributions (college, retirement, etc.) One can claim allowances for themselves, their spouse, any dependents, and a variety of other miscellaneous reasons. Each year, the IRS issues tax refunds to tens of millions of Americans who withhold too much in taxes. This allows individuals to claim refunds ahead of time and avoid paying costly taxes in April. However, this choice is a personal one; it might be more advantageous for an employee to walk with more money in each paycheck, and pay more in taxes at a later time. No interest is paid on over-withholding, but penalties might be imposed for under-withholding. Consult with one of Community Tax professionals to strategize your financial situation and get advice on how to prepare your taxes.

If you’re unsure about how much pay to withhold from your paycheck, use the Online Withholding Calculator found on the IRS website.

 

How Do I File a W-4?

If you are exempt from withholding, you don’t have to do much to fill out your W-4. Exempt employees only need to fill out lines 1, 2, 3, and 4 (name, address, marital information and Social Security number), note your exemption at line 7 and sign the form.

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All other employees will use the Personal Allowances Worksheet used to calculate the number of allowances to claim. This worksheet is based on the employee’s anticipated tax filing for the year. Always claim one on line A for yourself, unless someone else can claim you as a dependent. Line B refers to your marital and employment situation, while Line C refers to your spouse exclusively. Claiming zero on line C can help prevent under-withholding. Enter the number of dependents you will claim on your tax return on line D. If you are the head of household, or unmarried and paying over 50% of the costs keeping up a home for you and your dependents, mark one on line E. If you plan to claim a credit for at least $2,000 in child or dependent care expenses, enter one on line F. If your income level qualifies for Child Tax Credit, claim to the corresponding number of allowances per instruction on line G. The sum of lines A-G is inputted into line H, and serves as the final number for your Personal Allowances.

The worksheet on page two of the Form W-4 will allow for further customization of withholding allowances based on itemized deductions, certain credits, adjustments to income, or two-earners/multiple job situations. For employees with two jobs, the IRS recommends claiming all applicable allowances for the highest paying job and claiming zero allowances for the second job. Use your number of allowances to complete lines 1-7, sign and date the form, and file your W-4 by turning it into your employer. To get personalized help with filling out your W-4, talk to one of our licensed Community Tax members and get the advice you need to come out ahead.

 

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