Most people come across a W-4 form, but not everyone realizes how much power the W-4 form has over their tax bill. Here’s what the form is for, how to complete it, and how it can improve your tax situation.
A Form W-4, officially titled “Employee Withholding Certificate,” is an IRS form used by employees to tell employers how much tax to withhold from each paycheque. Employers use the W-4 to calculate certain payroll taxes and remit taxes to the IRS and the state on behalf of employees.
You do not have to complete the new W-4 form if you already have one on file with your employer. You also don’t have to fill out a new W-4 every year. If you are starting a new job or want to adjust your deductions on your existing job, you will likely need to complete the new W-4. Either way, it’s a great excuse to review your deductions.
In the past, employees could claim allowances on their W-4s to reduce the amount of federal income tax withheld from their pay. The more payroll deductions an employee claims, the less their employer will withhold from their paycheques. However, the 2017 Tax Cuts and Jobs Act overhauled many tax rules, including removing personal exemptions. This prompted the IRS to amend Form W-4.
The new W-4, introduced in 2020, still asks for basic personal information but no longer requests a certain number of allowances. Now, employees who want to reduce their withholding tax must report dependents or use a deduction worksheet.
How to complete a W-4 form
Form W-4 is available on the IRS website. Here’s how to perform the steps that apply to your situation.
Step 1: Personal information
Enter your name, address, social security number, and tax status.
Step 2: Count multiple tasks
If you have more than one job or if you are filing jointly and your spouse is working, follow the instructions below for a more precise deduction.
If you are single and have multiple jobs, or if you are married and are filing jointly and both work:
You should generally have a W-4 on file for each job.
For the highest paying W-4 job, complete steps 2 through 4 (b) of W-4. Leave these steps blank on the W-4s for other work.
If you are married and jointly report and both earn roughly the same amount, you can check a box that says as much. The trick: both spouses must do this on each of their W-4s.
If you don’t want to reveal to your employer that you have a second job or that you have income from other non-professional sources, you have several options:
On line 4 (c), you can ask your employer to withhold an additional amount of tax from your paycheck.
Otherwise, ignore the extra income in your W-4. Instead of having tax taken directly from your paycheck, send estimated quarterly tax payments to the IRS yourself instead.
Step 3: Claim dependents, including children
Step 4: Refine your deductions
If you want to withhold additional tax or plan to claim deductions other than the standard deduction when you do your taxes, you can write it down.
Step 5: Sign and date your W-4
Once completed, return the form to your employer’s human resources or payroll team.
What should I put on my W-4?
Here are two general strategies:
If you received a huge tax bill when you filed your tax return last year and you don’t want another one, you can use Form W-4 to increase your withholding. This will help you owe less (or nothing) the next time you file.
If you got a huge refund last year, you are giving the government a free loan, and you could live on less than your salary unnecessarily all year round. Consider using Form W-4 to reduce your withholding.
And here are some steps you can take to get a specific result:
How to have more taxes on your salary
If you want more tax to be taken from your paychecks, possibly resulting in a tax refund when you file your annual return, here’s how you can adjust your W-4.
Reduce the number of dependents.
Add an additional amount to be withheld on line 4 (c).
How to have less tax on your salary
If you want less tax taken from your paychecks, which might require you to pay a tax bill when you file your annual return, here’s how you can adjust your W-4.
Increase the number of dependents.
Reduce the number on line 4 (a) or 4 (c).
Increase the number on line 4 (b).
How to use a W-4 so you don’t owe anything on a tax return
If your goal is to design your payroll deductions so that you end up with a $ 0 tax bill when you file your annual return, the accuracy of your W-4 is crucial.
Your W-4 reflects your current family situation. If you’ve had a baby or a teenager who turned 18 this year, your tax situation is changing and you may want to update your W-4.
You accurately estimate your other sources of income. Capital gains, interest on investments, rental properties, and self-employment are just a few of the many other sources of non-work income that might be taxable and worth updating on line 4. (a) of your W-4.
You accurately estimate your deductions. The W-4 assumes that you get the standard deduction when you file your tax return. If you plan to itemize (likely because itemization will reduce your taxes more than the standard deduction), you will want to estimate these additional deductions and change what’s on line 4 (b). Need help? There are worksheets in the Form W-4 instructions to help you estimate some tax deductions you may have ahead. The IRS W-4 Calculator Where The NerdWallet Tax Estimator can also help.
You benefit from the additional hold line. If you want a specific number of additional dollars to be withheld from each tax check, you can put it on line 4 (c).
Three things to keep in mind when filling out the W-4 form
1. Note whether you are exempt from withholding tax.
Being exempt means that your employer will not withhold federal tax from your pay. (However, Social Security and Medicare taxes will still be taken from your check.) As a general rule, the only way to be exempt from withholding tax is if two things are true:
You got a refund of all your federal income tax withheld last year because you didn’t owe tax, and
You would expect the same to happen this year.
If you are exempt from withholding, write “exempt” in the space under step 4 (c). You still need to complete Steps 1 and 5. Additionally, you will need to submit a new W-4 every year if you plan to continue claiming. withholding exemption.
2. File a new W-4 form when life changes.
You can change your W-4 at any time, but if any of these things happen to you during the year, you may especially want to update your W-4 so that your withholdings reflect your tax life:
3. Be comfortable with your deductions.
DIY is OK. You are allowed to give your employer a new W-4 at any time. This means you can fill out a W-4 form, give it to your employer, and then examine your next paycheck to see how much money has been withheld. Then you can start to estimate how much you will have withdrawn from your paychecks for the entire year. If it doesn’t look like this will be enough to cover your entire tax bill, or if it looks like it will end up being way too high, you can submit another W-4 and adjust.
If you want an additional fixed amount to be withheld from each paycheck to cover taxes on freelance income or other income, you can enter this on lines 4 (a) and 4 (c) of Form W -4.