A W-4 form is an important form related to tax that has to be submitted every time one starts a new job. It is officially known as Employee’s Withholding Allowance Certificate and this form gives information to your employer about how much federal income tax needs to be withheld from your paychecks. An important implication of filling out the W-4 form is that it directly affects the net pay of an employee. Let us now explore how the form W-4 needs to be filled stepwise.
Basic information about Form W-4
Most of the employees fill the W-4 form but really don’t understand the details regarding what kind of information they are entering in this form and how it affects their paychecks. As already mentioned, W-4 form needs to be filled every time one starts a new job and it also needs to be filled again if the financial status or the filing status of the employee changes. For example, employees need to fill up form W-4 again if their marital status changes or they welcome a child in their family.
Withholding is an important concept to be understood before filling up the W-4 form. Withholding entails a certain portion of the pay of an employee being deducted and sent to the government. This money is used to pay the annual tax bill of the employee. Even if one is not working, taxes may be withheld from other sources of income an individual is having in the form of pensions, annuities, and others.
Once the W-4 is submitted by an employee, the details must be updated by
the employer by the beginning of the pay cycle that ends 30
or more days after the form has been submitted.
If an employee fails to submit a W-4 form to an employer, the IRS will deduct taxes from the income of that particular employee considering that they are single with zero withholding allowances. Hence, it is necessary to fill out this form accurately and in a timely fashion to ensure that you don’t get an unreasonable tax bill.
Filling the allowances section
- It is recommended that before filling up a W-4 form, the employee must complete the personal allowances worksheet. This will help them to understand what allowances they need to claim.
- It should be noted that as the number of allowances increases, the amount of money withheld from the paycheck decreases.
- Although isn’t necessary to submit the worksheet to the employer, it helps immensely in filling up the W-4 form and help the employees understand what kind of tax bill they should expect.
As seen in the screenshot above, you will need to enter numbers in lines A to G based on your unique situation, so it is necessary to read the instruction mentioned in the form carefully. This part of the form assumes added significance if you are married or are claiming a dependent or both. After you are done with filling all the boxes from A to G, the sum of the allowances needs to be written on line H.
Figuring out deductions and adjustments
If any deductions and adjustments are required to be made in a W-4 form, you need to move on to the next section of the worksheet.
In this section of the worksheet, employees need to estimate their adjustments and add up their deductions. Examples of deductions include giving to a charity or mortgage payments. To help you in this process, IRS has provided a withholding calculator that will guide you in knowing the number of allowances you can claim and also help out in figuring the number of income adjustments you are allowed.
Two-Earners/Multiple jobs sections explained
If you are married and your spouse is working or if you hold more than one job, you need to fill the two-earners/multiple jobs worksheet that is located on page four of the W-4 instructions. Also, the number from line H on the personal allowances’ worksheet section needs to be filled on line 1 of this worksheet, unless you have deductions.
As shown in the screenshot above, there are two tables at the bottom of page four of the W-4 form. These tables help in filling the lines 2-9. These tables explain the kind of numbers one needs to enter that depends on which spouse makes the most/least amount of money and which jobs bring in the maximum/minimum income in case you hold more than one job.
Filling up the W-4 form
After filling up the entire worksheet, you can now proceed to fill up the W-4 form. Take care to keep the filled-up worksheet as a record so that you know the basis of your calculations.
As can be seen in the screenshot above, personal information in the form of your name, address, social security number, and filing status needs to be filled through lines 1-4. In line 5, you have to state the total number of allowances you are claiming. This number can be filled by referring the line H on your personal allowance worksheet or the number from line 10 on the deductions and adjustments worksheet. In line number 6, you have to state the amount of extra money you want to withhold from your paycheck or the total amount from the two earners/multiple jobs worksheet.
To avoid withholding, you have to satisfy the below criteria.
- Your tax liability was nil in the previous tax season. All of the federal income tax you had paid was refunded back.
- Your tax liability is nil again this year.
You can safely assume that you have no tax liability if you don’t need to
file an income tax return or you don’t owe any taxes. You can also be exempted
from withholding if your income for the year is $1000 or less.
If you satisfy the above criteria, you can write ‘exempt’ in line 7. However, you should keep in mind the fact that this exemption only nullifies your federal income taxes. You still have to pay the Medicare and Social Security taxes.
Lastly, you have to sign the form and the whole process is completed.
Difference between the W-4 and W-2 forms
The major difference between forms W-4 and W-2 is that form W-4 is filled by the employee while the form W-2 is filled by the employer. Form W-2 represents the total amount of money that was withheld from the gross salary of the employee and paid for Social Security, Medicare, federal, state and local taxes. The W-2 form can also be used as proof of your annual earnings.
Important points to consider
- All new employees should fill a W-4 form, and failing to comply with the same can have big implications in the form of huge tax liability.
- You need to fill the right number of allowances on the W-4 form.
- If you claim too few allowances, it translates into a smaller paycheck and a big tax refund.
- If you claim too many allowances, it could lead to a huge tax bill when you file your tax return.
- You should also keep in mind that there are changes in the tax code as compared to previous years due to the enactment of the Tax Cuts and Jobs Act.