After you accept a job offer, your new employer will ask you to fill out Form W-4. The U.S. government requires employees to fill out a W-4. It tells your employer how much money to withhold from your paycheck for federal income taxes. As daunting as that may sound, the W-4 is a relatively easy form. It takes up less than one page and there are only seven lines for you to actually fill out. So whether you’re a hiring manager or a hopeful new employee, let’s break down the purpose of the W-4 and the information it contains.
What Is Form W-4?
The official title of Form W-4 is Employee’s Withholding Allowance Certificate. When you complete the W-4 correctly, it informs your employer of how much money to withhold from your paycheck for federal income taxes. Because of this, you need to fill out a new copy of the form anytime you start a new job. You can also fill out a new W-4 at any other time. If you experience a big financial change in your life, like if you get a big raise or have a child, you should fill out a new W-4. The IRS also recommends filling out a new W-4 each calendar year. This helps ensure that you’re always paying the right amount in taxes.
What’s on Form W-4
Form W-4 comes in a four-page packet. However, the form itself is quite short. It takes up less than half of the first page and has only 10 lines, three of which are for your employer. The information that employees need to enter includes:
- Name and address
- Social Security number
- Filing status – single, married or married filing separately
- How many allowances you’re claiming
- Any additional money you want your employer to withhold
Employers then enter their name, address, employer identification number (EIN) and the first date of the employee’s employment.
The other three pages of the W-4 packet include instructions and the following three worksheets:
- Personal Allowances Worksheet
- Deductions, Adjustments, and Additional Income Worksheet
- Two-Earners/Multiple Jobs Worksheet
These worksheets are just for your records. They help you to complete the form correctly and you don’t need to submit them to your employer when you fill out the W-4. If you haven’t done so before, it’s a good idea to actually go through the worksheets that apply to you. This helps you see exactly what the information on your W-4 is and where it comes from.
What Is Federal Tax Withholding?
The biggest part of the W-4 (for employees) is stating how many allowances you’re claiming. Before we explain what allowances are, it’s necessary to understand tax withholding.
Each time you get paid, your employer takes out (withholds) a certain amount of money from your paycheck. This money goes toward your federal income taxes and some other federal taxes, like the FICA taxes. Because the U.S. has a pay-as-you-go tax system, you pay your income taxes throughout the year instead of as one lump sum during tax season. So every employer needs to withhold money for their employees’ federal taxes, and send it to the IRS. When determining how much to withhold, your employer will consider your salary and the information on your W-4.
It’s also good to note that retirees who receive a monthly pension or annuity check must also withhold money from each payment. If you have other earnings, such as from bonuses, commissions or gambling, you likely need to withhold money. Self-employed workers, independent contractors, small business owners and others without an employer must withhold their own taxes. You can do this by paying estimated taxes.
What Are Personal Allowances?
When your employer withholds tax, your salary will factor in because it determines your tax bracket. However, you can change the exact amount your employer withholds by changing the number of allowances you claim.
An allowance is effectively an exemption from paying a certain amount of income tax. When you claim an allowance, you’re telling your employer that you qualify not to pay a certain amount of tax. The more allowances you claim, the less money your employer withholds for taxes. If you do not claim any allowances, your employer will withhold the maximum amount possible. The value of a single allowance depends on factors like your tax bracket, the frequency of your paychecks and your filing status.
Neither your employer nor the IRS checks to see that you qualify for the number of allowances you claim on your W-4. (However, come tax time, if you’ve claimed allowances you shouldn’t have, you’ll wind up owing the government money.) That means it’s up to you to fill out the form correctly. The best way to determine how many allowances you should claim is to work through the Personal Allowances Worksheet in the Form W-4 packet. You can find the packet on the IRS website if you want to recalculate your allowances at any time. To help you through the process of determining how many allowances you qualify for, we go through this worksheet step-by-step in our guide to filling out your W-4.
What Is Additional Withholding on Your W-4?
On top of your allowances, you can also request that your employer withhold a certain amount of extra money. This additional withholding also goes toward your income taxes and helps you fine-tune your tax bill. Ideally, you will will neither owe a significant amount of money nor get a big refund when you file your tax return in April. Additional withholding helps you right-size your taxes if you’re expecting to get a refund.
For example, let’s say you estimate your federal tax return and find that you’re going to get a refund of about $1,000. If you get paid twice each month (24 pay periods) then you may want to withhold an additional $40 from each paycheck. This will bring you close to paying exactly how much you owe in annual income taxes.
What Employers Do With a W-4
As an employer, it’s important to have all of your employees complete a W-4 when they join your company. You should keep an employee’s most current W-4 on file in his or her payroll file. Then you need to be sure you input the correct number of allowances into your payroll processing system. If an employee does not complete and sign a W-4, you must withhold federal income taxes as though the employee is a single filer with zero allowances. (This is the highest withholding rate possible.)
The W-4 is the form where you claim allowances and instruct your employer on how much money to withhold from your paycheck for federal income taxes. You need to fill out a W-4 anytime you start a new job. You should also update the form when you experience major financial changes, like when you purchase a home. With that being said, the W-4 is among the most straightforward IRS tax forms. There are only 10 lines total, seven for employees and three for employers. To help you fill out the form correctly, it’s also a good idea to estimate the size of your paycheck with a free paycheck calculator. Then you can adjust your allowances or make additional withholding as necessary.
If you’re still looking to get a stronger grip on your personal finances, consider working with a financial advisor. An advisor matching tool like SmartAsset’s can help you find a professional to work with. First you’ll answer a series of questions about your financial situation and goals. Then the program will narrow down your options from thousands of advisors to three in your area who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose the financial advisor who’s the best fit for your goals.
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