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Understanding How to Complete a W-4 Can Help You Financially
September 16, 2017
To many new employees, a W-4 may seem complicated. Employees are required to complete a Form W-4 so that their employers know how much federal income tax needs to be withheld from their paychecks. This will determine the amount of money you will take home each paycheck. In addition, you want to ensure that you have the right amount of tax withheld from your paycheck because it can impact your tax outcome on your next tax return. You could face a big tax bill and potential penalties and interest when you file the following year if you have too little withheld. In order to avoid owing money on your taxes, you need to understand how to complete your W-4.
Many employees wonder why their employer withholds so much from their pay. However, your employer has no discretion how much tax is withheld from your employee’s pay. Withholdings are based on the amount that corresponds with the IRS withholding tables. The table is broken down based on your pay, the time period and the information on your completed Form W-4. Therefore, the withholding allowances you claim on the Form W-4 is the portion of your earnings taken and sent to the government by your employer on your behalf. It’s a portion of your annual tax bill taken out of each paycheck. Even if you’re not working, you may have taxes withheld from other sources of income such as pensions, commissions and awards.
The more allowances you claim on your Form W-4, the less income tax will be withheld from each paycheck. In turn, if you do not claim very many allowances on your paycheck, more taxes will be withheld from each paycheck. The number of exemptions you should claim varies and is based on several factors, such as marital status, job status, earned wages, filing status and child or dependent care expenses. You can complete a new Form W-4 whenever you need to update your filing status and submit it to your employer to change your withholdings.
Before completing your Form W-4, take the time to complete the personal allowances worksheet. You will need to determine the number of allowances you are going to claim. Keep in mind that as your allowances increase, the money withheld from your paycheck decreases.
On the worksheet, enter numbers in lines A – G based on your situation. You need to follow the instructions in order to correctly complete the worksheet. This part of the form may take more time to finish if you are claiming a dependent and/or are married. If you’re single with one job, you will enter “1” for line A and “1” for line B.
Write the sum of your allowances on line H. If you are not married with one employer, you will enter “2” on line H. If you have any deductions or income adjustments to make, you need to complete the second page. You can make adjustments if you are paying alimony, moving or have a health savings account. You need to estimate your adjustments and add up your deductions that come from giving to charity or having a mortgage on the deductions and adjustments worksheet. You can also utilize the IRS withholding calculator to itemize your deductions, tell you how many allowances you can claim and determine the amount of income adjustments allotted to you.
If you are married to a spouse and your spouse also works or you work a second job, you will want to complete the two-earners/multiple jobs worksheet. The number from line H on the personal allowances worksheet goes on line 1 of this worksheet, unless you have deductions or allowances. There are two tables at the bottom of the page to help you complete lines 2 through 9. The tables tell you what numbers to enter depending on you and your spouse’s income situations.
These worksheets can now be used to complete your Form W-4. Lines 1 through 4 of the W-4 are for your personal information: your name, address, social security number and filing status. Line 5 is for either the number from line H on your personal allowances sheet or the number from line 10 on your deductions and adjustments worksheet. On line 6 write in, any additional money you want withheld from your check or the total from the two earners/multiple jobs worksheet.
In order to avoid withholding altogether, you need to have no tax liability this year and you had no tax liability in the previous tax season, so all of the federal income tax you paid was given back to you. You can say you have no tax liability when you’re not required to file an income tax return or you owe zero taxes. You may also be able to claim an exemption if your earned income for the year is extremely low ($1,050 or less). If either of these circumstance apply to you, you can write “exempt” in line 7. This exemption only eliminates federal income taxes. You will still be responsible for Medicare and Social Security.
You can now sign the form and give it to your employer.
Keep in mind that it may be easier to have too much tax withheld instead of figuring out how to properly fill out the Form W-4 to determine how much you should have withheld. However, you are allowing the IRS to hold onto your money for a year. Although many Americans opt to have money money withheld to avoid the risk of having a tax bill at the end of the year even if it is a small amount. If you take the time to properly complete the Form W-4, you can still choose to have a little extra withholdings so you can get a refund check but at least you can avoid having too much tax over withheld.