What is a W-4 Form? What It Means and How It Affects Your Taxes

March 26, 2018 : Ashlee Crowl

Editor’s Note: This article was originally published on September 1, 2015. 

The W-4 Form is the IRS document you complete for your employer to determine how much should be withheld from your paycheck for federal income taxes and sent to the IRS. Accurately completing your W-4 will help you avoid overpaying your taxes throughout the year or owing a large balance at tax time.

Usually, the first day of a new job is when many taxpayers complete a W-4 tax form. However, many don’t really understand what the form is asking or how it affects your taxes. Maybe you take a guess at how to fill it out. Or maybe a friend has advice. While those options aren’t terrible, it could lead to your paying too much or too little in taxes. So, here’s the lowdown on Form W-4. For information about how tax reform affects withholding, review whether you should submit a new W-4 for 2018.

I got a new job so I have to complete my Form W-4, but I don’t really know what the form is for.

As mentioned above, when you start a job, all employees complete a Form W-4, which determines the amount of federal income taxes your employer will withhold from your paychecks throughout the year. It does not change the amount of your pay that will go toward Social Security and Medicare. Those are defined amounts.

How is the amount of income tax determined?

The W-4 is used by your employer to determine how much income tax to withhold based on your marital status and the number of withholding allowances you claim.

What are these withholding allowances?

There is an allowance worksheet that will help you calculate the number of allowances. Generally, you claim allowances for yourself, your spouse if you’re filing jointly, and children under 17 for whom you can claim the child tax credit.

There are additional withholding allowances that are related to credits and deductions. For example, you add additional allowances if you itemize deductions.

While the calculation can seem a little complex, there are resources to help you determine how much you should be withholding. One particular resource worth trying is the IRS Withholding Calculator. Just plug in your information and it will help you to determine how many allowances to place on your W-4.

Related: See our infographic that breaks down Form W-4.

So does the number of allowances on the W-4 have to be the same as the number of people in my family?

No.

In fact, if both spouses work, or if you have two jobs, the allowances should be different on each W-4. If both spouses claim allowances for the other person, the amounts would be withheld twice. Under the Tax Cuts and Jobs Act, the number of allowances you claim for children and other dependents will vary based on the children’s ages, your income, and other factors.

This is confusing. How about I just put zero allowances so I know I’m paying enough in taxes?

Well, it’s an option, but not always a preferable one. When you default to zero allowances, the maximum amount is withheld. Depending on your tax situation, it could result in a big refund check, but you are essentially extending an interest free loan to the government by allowing them to hold on to your money all year. Many taxpayers would be better off receiving more of their pay check throughout the year to cover personal expenses, pay down credit card balances, or by using the amounts to generate income another way, such as investing or contributing to a retirement account.

There is a caveat: do make sure to have enough withheld. Otherwise, you may have a larger federaltax bill once you file your return.

Someone told me that I needed to check my W-4 since I got married. Why?

It is best to revise your W-4 after significant life events such as getting a new job, getting married or having your number of dependents change – like when a baby is born or adopted or when your adult child is no longer considered a dependent. Since the amount withheld is based, in part, on the number of people in your family and is affected by other tax credits, you want to check to make sure that the number of allowances is still appropriate.

The IRS directs that you complete a new W-4 within 10 days of any major life events.

Some taxpayers should also consider revising Form W-4 because of the Tax Cuts and Jobs Act. For instance, taxpayers who itemized deductions last year may not be able to claim all of their state and local taxes because of the new $10,000 limitation. The IRS has revised Form W-4 instructions to take the tax law changes into account.

One of my co-workers told me to declare myself exempt so that I get more of my paycheck. Is that a good idea?

No, it’s not a good idea to claim you’re exempt in order to get a bigger paycheck.

By certifying that you are exempt, the employer would not withhold any federal income tax amounts during the year, and that would result in a large tax bill due on April 15. In addition to having to pay a whole year’s worth of taxes, you could also face interest, underpayment penalties and other consequences.

You may certify that you are exempt only if you meet the following criteria.

  • For the prior year, you had a right to a refund of all federal income tax withheld because you had no tax liability
  • For the current year, you expect a refund of all federal income tax withheld because you expect to have no tax liability

Most people do not meet these criteria, but if you do, then by all means listen to that co-worker.

What if I realize now that I have not been withholding enough so far this year?

This is the good part – you can complete a new W-4 at any time to change the number of allowances you claim going forward. If you are pretty far into the tax year, you may want to decrease your allowances or have a set amount withheld from your remaining paychecks. This will help compensate for amounts that would have been withheld earlier in the year. While it’s a more significant decrease of your monthly income, it helps ensure that you do not have a large liability at tax time. If you do need to do that, make sure to adjust the amount back at the beginning of the next year.

Here is an example to clarify this: On the advice of a friend, Jamie claimed three allowances on her Form W-4 in order to increase her take-home pay. Normally Jamie would be able to use just one or two one allowances, because she is single and doesn’t have any children. However, since she has not been withholding sufficient amounts for the first half of the tax year, she might go ahead and use zero allowances to withhold a little bit more for the rest of the year to compensate. She should also consider having a set additional amount withheld. In January she will then complete a new W-4 using one exemption, since she has not had any major life changes.

I ended up owing a lot to the state where I worked. What happened?

Often we think about adjusting our federal income tax withholding, but forget that most states also charge an income tax, so amounts must be withheld for that, too. When you update your W-4 for your federal income taxes, make sure you check on the W-4 for the state that you live in. Also make changes for other states if you work in a different state, own a business interest in another state or if you moved during the tax year.

Head still spinning a bit? Our offices are open year-round. Make an appointment to get additional help from an H&R Block tax professional.

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Ashlee Crowl

Ashlee Crowl

Contributor, The Tax Institute