Most people cross paths with a W-4 form, but not everybody realizes how much power the W-4 has over their tax bills. Here’s what a form W-4 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, which is formally titled “Employee’s Withholding Allowance Certificate,” is used for telling employers how much tax to withhold from each paycheck. The employee fills out the W-4. The employer uses the W-4 to calculate certain payroll taxes and remits the taxes to the IRS on the employee’s behalf.
- The IRS has a new W-4 form in the works, but it will be for the 2020 tax year (not 2019). Your employer might ask you to fill out a new W-4 at that point, which is a great excuse to review your withholdings.
- At the end of the year, your employer will send you a different tax form, called a W-2, showing (among other things) how much tax it withheld for you that year.
How to fill out a W-4 form
- 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 (www.IRS.gov/W4), 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. The hard part is deciding the number of allowances to claim.
- Don’t panic if you don’t know how to fill out a W-4. The W-4 form comes with an allowances worksheet that will help you figure out how many to claim.
- The more allowances you claim, the less tax will be withheld from your paycheck.
- Here’s a handy, color-coded guide to some of the most important parts of a W-4.
The best way to fill out 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.
- The more allowances you claim, the less tax will be taken out of your paycheck.
That’s the short version. Our handy withholding calculator can help you determine if you’re withholding enough. Below it, we dig in a bit deeper.
Tips for filling out a W-4 form
1. See if you’re 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 about personal allowances.
The exact amount your employer withholds depends on how much you earn and what you put on Form W-4. Three things go into the mix:
- Whether you’re single or married
- How many withholding allowances you claim
- Whether you want any extra money withheld
The more allowances you claim, the less tax is withheld. Here are examples of things that get you an allowance:
- Having a spouse
- Having kids
- Filing as head of household on your tax return
It might be tempting to claim a ton of allowances so you can keep more of your pay, but that’s usually a bad idea, says Shawn Hermanson, a certified public accountant in Coon Rapids, Minnesota.
“We’ll have people that will go in that are single and unmarried and what they’ll do is they’ll list eight or nine exemptions and have little to no withholding taken out of each paycheck,” he says. “That’s a big problem. Unless you’ve got a mountain of deductions or losses to help offset that income, you’re going to end up with a nasty surprise on April 15.”
- Need more help? There are worksheets in Form W-4 to help you calculate allowances and account for certain tax deductions you might have coming. The IRS’ W-4 calculator can also help.
3. Get comfortable fiddling with your withholdings.
Tinkering is OK, says Dave Danic, tax manager at Summit CPA Group in Fort Wayne, Indiana.
“Here’s what you do. If you come up with a 2 [for allowances] and you want a bigger refund, then I would say let’s lower it down to 1. Then, check your next paycheck to see how much more money was withheld. Then you can start annualizing what your withholdings are going to be at the end of the year,” he said.
If you want an extra set amount withheld from each paycheck, enter it on line No. 6 of Form W-4.
4. File a new W-4 form when life changes.
You can change your W-4 at any time. If any of these things happen to you during the year, update your W-4 so your allowances and withholdings reflect your tax life:
- You get married or divorced
- You have a kid
- You buy a house
- You take a pay cut or get a big raise
- You work only part of the year
- You have a lot of dividend income
- You or your spouse freelance on the side
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 1099s from their clients, not W-2s. Employers must send employees a W-2 by the end of January each year.