SoFi

The W-4 form plays a big role behind the scenes when it comes to your taxes. If you’re a regular employee who has taxes taken out of each paycheck, you’ve likely filled out a W-4. This document determines how much in taxes you may end up owing at the end of the year or how much you’ve overpaid. That’s why it’s key to know when you should fill one out and how to do it correctly.

Here, get familiar with the W-4 form so you’re better prepared to manage your finances year-round and file your return during tax season. You’ll learn:

•   What is a W-4?

•   How does a W-4 work?

•   How do you fill out a W-4?

•   How does a W-4 affect taxes?

What Is a W-4?

The W-4 form, formally known as the Employee’s Withholding Certificate, is an Internal Revenue Service (IRS) document you fill out for your employer. It lets them know the correct amount of payroll deductions to take out of your paycheck for income tax purposes.

The amount your employer subtracts from your pay and sends to the IRS is called tax withholding. Any full- or part-time employee whose employer withholds taxes will be asked to fill out the W-4 form.

You may also need to fill out an additional type of tax form, a separate state W-4, if you work in a state that has its own income tax. (Some states may use the federal form.) A state W-4 form works similarly to the federal form, allowing your employer to calculate the amount of taxes to withhold and send to the state.

Additionally, there are three other types of W-4’s you may want to know about, in case you choose to have extra tax withheld from a particular entity.

•   The W-4P form calculates any withholding you may want from any pensions and annuities.

•   The W-4S calculates federal income tax withholding from sick pay paid by a third party, such as an insurance company.

•   The W-4V calculates withholding from government payments, for example, unemployment or Social Security payments.

How Does a W-4 Work?

Now that you know what a W-4 form is, take a closer look at how it works. When you get a new job, your employer will ask you to fill out a W-4. Once you complete it (see details below), you give it back to your employer. Then, when you get your first paycheck, the tax withholdings will appear based on the information provided on your W-4. The money withheld from your paycheck is paid to the IRS and, if applicable, to the state on your behalf.

Unless you choose to update your W-4 at some point while you’re working for that employer, you don’t have to fill out a new W-4 every year unless you are claiming you are exempt from taxes (see below for details). Your W-4 form stays the same until you submit a new one.

There are certain instances where you will want to make changes to your W-4 to be better prepared for the next tax season.

•   First, you may realize that at the end of the year, the money withheld isn’t enough to cover your tax bill. In other words, you end up owing the IRS, so you can adjust the withholding document to avoid this.

•   On the other hand, consider if you’re having too much deducted and are on track for a hefty refund. You might rather have more money during the year instead of waiting for your tax refund. In this case, you can also alter your W-4.

•   Another reason to adjust your W-4 is when certain life events occur that can change your filing status, such as getting married, divorced, or becoming a parent.

Recommended: What Tax Bracket Am I In?

What Is the Purpose of a W-4?

As mentioned earlier, the W-4 form alerts your employer as to how much money to withhold in taxes from each paycheck. Your employer uses the form’s information to calculate these withdrawals, which is based on such factors as:

•   Your filing status (single, married filing jointly, married filing separately, or head of household)

•   Whether you work multiple jobs or if your spouse works

•   If you’re claiming any children or other dependents

•   If you want taxes withheld for other reasons.

When tax time comes, your employer will send you a W-2 form. This reflects your earnings as well as what was withheld in terms of payroll taxes all year. You can’t get that W-2 form if you didn’t fill out a W-4. For that reason, a W-4 is a key part of the tax filing process.

Process of Filling Out a W-4

There’s a five-step process to filling out a W-4 form:

•   Step 1: Provide your personal information. This includes your name, address, Social Security number, and your filing status, which can be:

◦   Single or married filing separately

◦   Married filing jointly or qualifying surviving spouse

◦   Head of household to be used if you’re unmarried and pay more than half the costs of keeping up a home for yourself and a qualifying individual.

•   Step 2: Indicate multiple jobs or that your spouse works. Complete this step if you hold more than one job at a time, or are married filing jointly and your spouse also works. The correct amount of withholding depends on income earned from all of these jobs. For instance, if you work more than one job, you’re asked to use the multiple jobs worksheet on page 3 of the form and then enter that information in a portion of step 4.

  You can completely skip step 2 if none of these things apply.

•   Step 3: Claim dependents and other credits. This step applies for people who qualify for the Child Tax Credit or the Credit for Other Dependents. Single tax filers with a total income of $200,000 or less ($400,000 or less if you’re filing jointly), can multiply the number of children you have under age 17 by $2,000 and other dependents by $500, to estimate tax credits you can receive for them.

•   Step 4: Other adjustments. Here, you have three options to have further money withheld.

◦   Option 1 is for other income that doesn’t come from a job, such as interest, dividends, and retirement income, the second allows you to claim deductions other than the standard deduction.

◦   Home mortgage deductions and student loan interest deductions may be possible, along with charitable donations.

◦   Lastly, you may request additional money be withheld from each paycheck. This would reduce your paycheck and either increase your refund or reduce any tax amount you owe.

•   Step 5: Sign and date the form. Once you do this, you can give the W-4 to your employer. They may have you do this digitally using an electronic signature, saving you the effort of having to print out the document and sign it.

Remember, if you have any questions about the steps on a W-4 form, ask your employer’s HR or payroll department for help. They should be able to answer any queries. A professional tax preparer or accountant can also be a source of support.

Recommended: How to File Your Taxes for the First Time

Claiming Exemption With a W-4

Any qualifying employee can use their W-4 form to choose to claim exemption and have no taxes withheld. In order to be eligible for a tax exemption, the employee must not have had any tax liability, or money owed to the IRS, for the previous year and must expect to owe no money in taxes for the current year.

Keep in mind, if you do claim exemption and don’t have any income tax taken out of your paycheck, you may risk owing taxes and penalties when you file the next year’s tax return.

A W-4 form claiming exemption from withholding is valid for only the calendar year in which it’s submitted to the employer. In order to continue to be exempt from withholding in the next year, an employee must give the employer a new W-4 claiming exempt status by February 15 of that tax year. If the date falls on a weekend or legal holiday, the deadline is delayed until the next business day.

How a W-4 Affects Taxes

What’s a W-4 form responsible for? It tells your employer how much money to take out of your paycheck for taxes. In this way, it can increase or decrease your take-home pay. When you have more taxes withheld from your paycheck than necessary, you’ll likely get a tax refund. Having too little deducted means you’ll probably owe the government money when the tax season rolls around.

The Takeaway

Filling out your W-4 form correctly and updating it when necessary tells your employer how much tax money to deduct from your paycheck. A carefully completed W-4 can help you avoid paying too much in taxes during the year or owing the IRS come tax time.

If you’re going to receive a tax refund, you might be looking for a good place to deposit it where it will work hard for you. Why not open an online bank account with SoFi? Our Checking and Savings account offers a competitive annual percentage yield (APY), no account fees, and automatic savings features, all of which can help your money grow faster. What’s more, qualifying accounts with direct deposit get paycheck access up to two days early. That’s just one more good reason to stash your cash with SoFi.

FAQ

Do all people need to fill out a W-4?

No. Although most people do fill out a W-4 for their employer, if you’re self-employed, an independent contractor, or a freelancer and the business you’re working for doesn’t withhold your taxes, you won’t need to fill out a W-4 form. Instead, you’ll likely fill out a W-9 form for your employer(s) and be responsible for paying taxes from their earnings on their own.

What happens if you don’t fill out a W-4?

Employees who don’t fill out a W-4 form will still probably receive a paycheck, but their employers will likely withhold taxes at the highest rate possible. Usually, this would be as a single filer with zero allowances or adjustments.

What is the difference between a W-2 and a W-4?

Form W-4 and W-2 are related but are very different IRS tax forms. A W-4 tells your employer how much tax to withhold from your upcoming paychecks. You need to fill it out for your employer when you start a job or when you have a life change that impacts your taxes.

A W-2 is a form that your employer sends you during tax season, documenting how much you earned and how much tax your employer withheld during the past tax year.

Photo credit: iStock/MStudioImages

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOBK0123015