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Most people cross paths with a W-4 form, but not everybody realizes how much power Form W-4 has over their tax bill. Here's what the form is used for, how to fill it out and how it can make your tax life better.
What is a W-4 form?
A W-4 form, formally titled "Employee's Withholding Certificate," is an IRS form employees use to tell employers how much tax to withhold from each paycheck.
The employer uses the W-4 to calculate certain payroll taxes and remits the taxes to the IRS and the state on the employee's behalf.
Why you have to fill out a W-4
Income tax is a pay-as-you-earn affair — the minute you get paid, the IRS wants its cut. That’s why the W-4 exists: It’s a form that instructs your employer how much tax to withhold from each paycheck. Your employer remits that amount to the IRS on your behalf, and at the end of the year, your employer will send you a W-2 showing (among other things) how much it withheld for you that year.
How to fill out Form W-4
You’ll probably fill out a W-4 when you start a job, but you can change your W-4 any time. Just download it from the IRS website, fill it out and give it to your human resources or payroll team. The easy part is supplying your name, address, marital status and other basic personal information. Here are some instructions.
The W-4 form also comes with a couple of worksheets that will help you figure out your withholdings, but here's a handy five-point guide:
1. The 2020 version of form W-4 does away with asking people to choose a number of allowances.
Instead, you provide certain dollar estimates for the payroll system to use.
2. If you’re single and have multiple jobs or you’re married, filing jointly and both work, remember these things:
You typically have to have a W-4 on file for each job.
For the highest paying job’s W-4, fill out steps 2 to 4(b) of the W-4. Leave those steps blank on the W-4s for the other jobs.
If you’re married and filing jointly, and you both earn about the same amount, you can check a checkbox indicating as much. The trick: Both spouses need to do that on each of their W-4s.
3. If you are exempt from withholding, write “exempt” in the space below step 4(c).
You still need to complete steps 1 and 5. Also, you’ll need to submit a new W-4 every year if you plan to keep claiming exemption from withholding.
4. On the 2020 W-4, you can select the Head of Household filing status.
That wasn't an option on the 2019 W-4. If you file as head of household, you may want to consider filling out the 2020 W-4 if you want the amount of taxes withheld from your pay to more accurately align with your tax liability.
5. If you don’t want to reveal to your employer that you have a second job, or you don’t want to reveal to your employer that you get income from other non-job sources, you have a few options:
On line 4(c), instruct your employer to withhold an extra amount of tax from your paycheck.
Don’t factor the extra income into your W-4. Instead of having the tax come directly out of your paycheck, send estimated quarterly tax payments to the IRS yourself instead.
Try this W-4 calculator
What's the best way to fill out your Form W-4?
Here’s the general strategy:
If you got a huge tax bill in April and don’t want another, you can use Form W-4 to increase your withholding. That’ll help you owe less (or nothing) next April.
If you got a huge refund last year, you’re giving the government a free loan and could be needlessly living on less of your paycheck all year. Consider using Form W-4 to reduce your withholding.
FAQs about Form W-4 and optimizing your paycheck
1. Are you exempt from withholding?
Being exempt means your employer won’t withhold federal income tax from your pay. (Social Security and Medicare taxes will still come out of your check, though.) Generally, the only way you can be exempt from withholding is if two things are true:
You got a refund of all your federal income tax withheld last year because you had no tax liability, and
You expect the same thing to happen this year.
2. Be strategic.
The exact amount your employer withholds depends on how much you earn and what you put on Form W-4. Five main things go into the mix:
Whether you’re single, married or filing head of household. (Here's how to choose the right filing status.)
How many jobs you have.
How many dependents you claim. (See the rules for when you can claim a tax dependent.)
How much you think you'll claim in tax deductions for the year.
Whether you want any extra money withheld.
3. Get comfortable fiddling with your withholdings.
Tinkering is OK. You're allowed to give your employer a new W-4 at any time. That means you can fill out a W-4, give it to your employer and then check your next paycheck to see how much money was withheld. Then you can start estimating how much you'll have taken out of your paychecks for the full year. If it doesn't seem like it'll be enough to cover your whole tax bill, or if it seems like it'll end up being way too much, you can submit another W-4 and adjust.
If you want an extra set amount withheld from each paycheck to cover taxes on freelance income or other income, you can enter it on lines 4(a) and 4(c) of Form W-4.
4. File a new W-4 form when life changes.
You can change your W-4 at any time, but if any of these things happen to you during the year you might especially want to update your W-4 so your withholdings reflect your tax life:
You get married or divorced.
You take a pay cut or get a big raise.
You work only part of the year.
You have a lot of dividend income.
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5. Is there a new W-4 form in 2020?
Yes. The IRS has a new W-4 form for the 2020 tax year. But good news: you do not have to fill out the new W-4 form if you already have one on file with your employer, nor do you have to fill out a new W-4 every year.
If you change jobs in 2020 or want to adjust your withholdings at your existing job, though, you'll likely need to fill out the new W-4. Either way, it's a great excuse to review your withholdings.
6. What is the difference between a W-4 and a W-2?
Don’t confuse a W-4 with a W-2. IRS Form W-2, formally called the “Wage and Tax Statement,” details how much an employer paid you and how much withholding tax was deducted from your pay during the tax year. Freelancers or contract workers typically get a 1099 from their clients, not W-2s. Employers must send employees a W-2 by the end of January each year.
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