Why the W-4 Is Important
It’s important to complete this form correctly because the IRS requires
people to pay taxes on their income gradually throughout the year. If
you don't withhold enough tax, you could owe a surprisingly large sum to
the IRS in April, plus interest and penalties for underpaying your taxes during the year.
At the same time, if you withhold too much tax, your monthly budget
will be tighter than it needs to be. In addition, you’ll be giving the
government an interest-free loan when you could be saving or investing
that extra money and earning a return – and you won’t get your overpaid
taxes back until the following April when you file your tax return and
get a refund.
At that point, the money may feel like a windfall and you might use it
less wisely than you would have if it had come in gradually with each
paycheck. If you don’t submit form W-4 at all, the IRS requires your
employer to withhold at the highest rate, as if you were single and
claiming no allowances.
Figuring Your Allowances
IRS form W-4 comes with a Personal Allowances Worksheet to help you figure out how many allowances
to claim. Answering the worksheet’s questions creates a broad picture
of your tax situation that will allow your employer to withhold the
correct amount of money from your paycheck. You can claim one allowance
if no one else claims you as a dependent (which is the case for most
adults). You can claim another allowance if you are single and have only
one job, if you are married but your spouse doesn’t work or if your
wages from a second job or a spouse’s job are $1,500 or less.
In other words, you’re claiming a second allowance if your household
only has one major income source. You can also claim one allowance if
you have a spouse, one allowance for each dependent you will claim on
your tax return and one allowance if your tax-filing status is head of household. Finally, you can claim allowances for child and dependent care.
The worksheet has additional pages if your tax situation is more
complicated because you have more than one job, your spouse works or you
itemize deductions on your tax return instead of taking the standard deduction. IRS Publication 505, "Tax Withholding and Estimated Tax,"
provides additional information on how to complete form W-4 if you’re
having trouble. Keep the worksheets for your records; your employer does
not need them.
The more allowances you claim on form W-4, the less your employer
will withhold from your paycheck. The fewer you claim, the more your
employer will withhold. You can also use form W-4 to request additional
money be withheld from each paycheck, which you should do if you expect
to owe more in taxes than your employer would normally withhold based on
the number of allowances you are claiming.
One situation where you might ask your employer to withhold an
additional sum is if you earn self-employment income on the side and
want to avoid making separate estimated tax payments for that income.
You can also use form W-4 to prevent your employer from withholding any
money at all from your paycheck, but only if you are legally exempt from
withholding because you had no tax liability for the previous year and you also expect to have no tax liability for the current year.
When You Need to File a New Form
In general, your employer will not send form W-4 to the IRS; after
using it to determine your withholding, the company will file it. You
can change your withholding at any time by submitting a new W-4 to your
employer.
Situations requiring a change to your W-4 include getting married or
divorced, having a child or picking up a second job. You might also want
to submit a new W-4 if you discover that you withheld too much or too
little the previous year when you're preparing your annual tax return –
and you expect your circumstances to be similar for the current tax year. Your W-4 changes will take effect within the next one to three pay periods.
Money-Saving Tip
If you start a job in the middle of the year and were not employed
earlier that year, here's a tax wrinkle that can save you money. If
you will be employed no more than 245 days for the year, request in
writing that your employer use the part-year method to compute your
withholding. The basic withholding formula assumes full-year employment,
so without using the part-year method, you’ll have too much withheld
and you’ll have to wait until tax time to get the money back.
The Bottom Line
Take the time to calculate your withholding properly. You'll avoid
having to pay penalties at tax time and will keep as much of your
earnings as legally possible.
