The W-4 form plays a big role behind the scenes when it comes to your taxes. When you start a new job, you typically fill out this form to let your employer know how much money to withhold from each paycheck for federal taxes. As a result, it has a significant impact on whether or not you’ll owe — or get money back — come tax time.
Understanding how to correctly fill out Form W-4 is essential for managing your tax liability and avoiding any financial surprises come tax season. Below are key things you need to know, including the definition of the W-4 form, the purpose of the W-4, and how to fill out this key tax form.
Key Points
• The W-4 form helps employers calculate the correct federal income tax withholding.
• The 2020 revision introduced a more detailed multi-step process that can make withholding more accurate.
• To fill out your W-4, you need to provide your filing status, number of jobs, number of dependents, and any other adjustments to your income.
• Common W-4 errors include failing to update, incorrect personal details, and misclaiming dependents.
• Filling out your W-4 accurately helps you meet your tax obligations and prevents financial surprises.
What Is a W-4?
The Internal Revenue Service (IRS) Form W-4, also known as the Employee’s Withholding Certificate, is a document that employees in the U.S. fill out and submit to their employers. This form determines how much federal income tax should be withheld from your paycheck and, as a result, how much money you get to take home, or have directly deposited into your checking account, each pay period.
Depending on what state you live in, you may also need to complete a state withholding form. While some states use the federal Form W-4, others use their own state W-4 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.
History and Purpose of Form W-4
Federal income tax is a pay-as-you-go system. In other words, you are expected to pay tax as you receive income over the course of the year, rather than in one lump sum at the end. The W-4 form allows workers to let employers know the amount to withhold and pay for federal income taxes on each paycheck.
For decades, federal income tax withholding was based on an employee’s marital status and number of “allowances.” Allowances were exemptions that lowered the amount of income tax your employer would deduct. You were allowed one allowance for yourself and one for a spouse if you were married. You could also take allowances for anyone that you were responsible for financially. The more allowances you claimed, the less money was withheld and the more money you would take home.
In 2020, the IRS revamped the W-4 form and allowances were replaced by a multi-step process that uses your income, filing status, number of jobs, and number of dependents to determine withholding. This new approach allows employees to more accurately align their withholding to their actual tax liability at the end of the year.
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How Does a W-4 Work?
When you start a new job as an employee, you are required to complete a W-4 form. Once you submit a W-4, you don’t have to fill a new one out every year. However, you can update your W-4 whenever your financial situation changes.
The Relationship Between Allowances and Withholding
Prior to 2020, the W-4 form allowed employees to claim allowances to adjust their withholding amount. The more allowances you claimed, the less tax was withheld. However, the IRS has since revised the form, removing allowances and instead focusing on specific income details, dependents, and deductions to provide a more accurate withholding calculation.
How Employers Use Your W-4 Information
Employers use the information provided on a W-4 (such as your tax withholding status and other sources of income) to determine the correct amount of tax to withhold from your paycheck. Your employer calculates and deducts the federal income tax from each paycheck and remits it to the IRS on your behalf.
Adjusting Withholding to Avoid Overpayment or Underpayment
By filling out a W-4 accurately, you can align your tax withholding with your actual tax liability. If too much tax is withheld, you could receive a large refund at tax time, which means you have effectively given the government an interest-free loan. If too little tax is withheld, you may owe money when filing your tax return, and potentially incur penalties. If you owe money come tax time or receive a substantial refund, it’s a good idea to update your W-4 form.
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; or head of household).
You can stop here and simply allow your employer to withhold federal tax at the default level. For more accurate withholding, however, you may need to complete additional steps.
• 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 (which impacts your tax bracket). 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 children and other credits. This step will ask you how many qualifying children you have under age 17, as well as how many other dependents you have. Completing this step lets your employer know exactly how much to decrease withholding to allow for the Child Tax Credit and Credit for Other Dependents. (Note: it’s a good idea to have only one spouse allow for child/dependant-related tax credits on their W-4 to avoid under-withholding). Step 3 also allows you to add any other tax credits you are eligible for.
• Step 4: Make other adjustments. Here you have the option to account for other income you receive (which will increase your withholding), deductions you might qualify for (which will decrease your withholding), and any additional withholding you want your employer to take.
• Step 5: Sign and date the form. Once you do this, you can submit your 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 personal accountant can also be a source of support.
Common Mistakes to Avoid When Filling Out a W-4
Many employees make errors when completing their W-4, which can result in incorrect withholding. Common mistakes include:
• Never updating the form: The IRS also recommends reviewing your W-4 annually to make sure you’re not having too much or too little withheld. It’s a good idea to update your W-4 form whenever there is any significant change in your life that impacts your financial situation, such as marriage, divorce, or having a child. Failure to update your W-4 can result in inaccurate withholding.
• Errors in personal information: It’s important to double check that all of your personal details are accurate before you turn in your W-4. A small typo or one wrong number could lead to potential complications with the IRS.
• Completing unnecessary sections of the form: You are only required to fill out sections one and five. Only complete sections two to four if you’re claiming dependents, secondary jobs, or additional adjustments.
• Claiming too many or too few dependents. Incorrectly calculating your dependents can lead to errors in estimating tax credits, which results in incorrect withholdings.
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Claiming Exemption With a W-4
Certain employees may qualify for an exemption from federal income tax withholding, meaning their employer will not withhold any taxes from their paycheck.
Who Qualifies for Exemption Status?
To qualify for exemption status, an employee must meet both of the following criteria:
• Had no federal income tax liability in the previous year
• Expects to have no federal income tax liability in the current year
Employees who qualify must write “Exempt” on the W-4 in the space below Step 4(c), and only need to complete steps 1(a) and 1(b) and step 5.
Keep in mind that a W-4 form claiming exemption from withholding is valid for only the calendar year in which you submitted it to your employer. In order to continue to be exempt from withholding in the next year, you must give your 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.
Also bear in mind that, even if you qualify for an exemption, your employer will still withhold for Social Security and Medicare taxes.
How a W-4 Affects Taxes
The way you fill out your W-4 can significantly impact your tax return outcome. Here’s a look at how:
Impacts on Refunds and Tax Bills
Correctly completing your W-4 helps prevent unexpected tax bills or large refunds. It also ensures that you take home the maximum amount of your paycheck during the year while still meeting your tax obligations. This could result in extra funds that you can siphon into a high-yield savings account.
Adjusting Withholding Mid-Year for Life Changes
Major life events, such as marriage, divorce, having children, or a change in income, can affect your tax liability. It’s important to submit a new W-4 to your employer to reflect these changes to ensure proper withholding.
The Takeaway
Your W-4 form tells your employer how much tax money to deduct from your paycheck. A carefully completed W-4 can help you avoid owing the IRS come tax time. It also helps you avoid paying too much and getting a sizable refund.
While refunds can be nice, overpaying your taxes essentially means giving the federal government a free loan. It also means losing the opportunity to put that money to better use. The extra amount withheld from your paycheck could have been saved or invested, allowing it to grow and earn interest instead of remaining idle in the government’s hands.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
Do all people need to fill out a W-4?
No, not everyone needs to fill out a W-4. This form is required for employees so their employer can withhold the correct amount of federal income tax from their paycheck. However, independent contractors, freelancers, and self-employed individuals do not fill out a W-4 because they are responsible for paying their own taxes through estimated tax payments.
What happens if you don’t fill out a W-4?
If you fail to fill out a W-4 when starting a new job, your employer will default to withholding taxes as if you were a single filer with no adjustments, which could result in higher withholding. This may lead to a smaller paycheck and potentially a tax refund at the end of the year. However, if too little tax is withheld, you may owe taxes and possibly penalties when filing your tax return. It’s best to complete a W-4 accurately to avoid surprises.
What is the difference between a W-2 and a W-4?
A W-2 is a form employers send to employees (and the IRS) at the end of the year, summarizing wages earned and taxes withheld. A W-4, on the other hand, is a tax form an employee completes when they start a job, allowing their employer to withhold the correct amount of federal tax from their paycheck.
While a W-4 determines how much tax is withheld, a W-2 reports the total earnings and withholdings, which employees use to file their tax returns.
How often should I update my W-4?
You should update your W-4 whenever you experience a major financial or life change that affects your tax situation. This includes marriage, divorce, having a child, taking on a second job, or experiencing a significant income change. Additionally, if you owed taxes or received a large refund last year, adjusting your W-4 can help better balance your withholdings. The IRS also recommends reviewing your W-4 annually to ensure your tax withholdings align with your current financial situation.
Can I adjust my W-4 for additional withholding?
Yes, you can adjust your W-4 at any time to increase or decrease your tax withholdings. If you expect to owe more taxes, you can request additional withholding by entering a specific extra amount in Step 4(c) of the W-4 form. This can help avoid a large tax bill at the end of the year. Conversely, if you want to reduce your withholdings, you can update your form to reflect changes in your income, deductions, or tax credits.
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