Filling out Form W-4 is a mandatory task when you begin a new job, and you may need to update your form each year based on your personal or financial situation. The form provides the Internal Revenue Service (IRS) with the amount of money your employer holds from your income each pay period to pay income tax. It also helps you formulate your tax liability, income tax withholding, and the size of your tax refund each year.
Below we offer more in-depth information about Form W-4, how to fill out the form, and the factors that can impact whether you should increase or decrease the amount of tax your employer withholds for taxes from your paycheck.
What Is Form W-4?
Form W-4, also known as the Employee’s Withholding Certificate, is a document you must fill out for your employer when undertaking part-time and full-time employment, not contract work that receives income on Form 1099. The W-4 reveals how much federal income tax your employer must withhold from your paycheck, meaning filling out it correctly is critical to ensuring you don’t owe a huge amount to the IRS when you file your income taxes in April.
Once you complete Form W-4, your employer will file it with the IRS. Although it’s typical for you to submit a W-4 form with a new employer, you can submit a new form at any time to change your withholding amount. You do not want to have your employer withhold too much for taxes, and marriage, divorce, childbirth, and a part-time job are all common reasons employees submit new W-4 forms with their employers.
How to Fill Out Form W-4
Filling out Form W-4 requires proceeding through five steps on the document, each for different information about your financial situation to help determine your withholding. Steps 2, 3, and 4 are optional. The type of information you need for each step includes:
In Step 1 of Form W-4, you need to provide your personal information. This includes your name, address, and Social Security number. You also need to your filing status. The IRS recognizes five filing statuses on an income tax return:
- Married filing jointly
- Married filing separately
- Head of Household
- Qualifying widow(er) with dependent child
In Step 2 of the document, you must provide information about a second job. If your spouse works, you should also include that in Step 2. This will ensure your withholding will be the right amount for the income you receive in your household.
If you have children or other dependents, Step 3 is where you claim them. If you are single with children, you must earn less than $200,000 to do so. If you file your taxes jointly, you must earn less than $400,000. This section on Form W-4 provides you with the credits you can take for your withholding.
Step 4 is for employees who plan to claim itemized deductions when filing your income taxes. This is also the section where you report interest, dividends, or retirement income for the tax year. Some employees choose to withhold additional amounts from each paycheck to increase their refund, which you can enter on Step 4 of Form W-4.
In Step 5 of Form W-4 you must provide your signature, verifying that the information you’ve provided is accurate.
Calculating Your Withholding Amount on Form W-4
Prior to 2020, filling out a W-4 for your employer meant you had to claim a certain number of allowances. Single filers claimed 0 and had the most income deducted from their paychecks. As the number of withholding allowances increased, the amount of withholding decreased.
In 2020, the IRS revamped and simplified Form W-4, so employees no longer claim specific allowances. Instead, as you proceed through each of the steps, you ultimately calculate your withholding. The IRS suggests changing the amount your employer withholds in the following situations:
Increasing Withholding on the New W-4 Form
According to the IRS, you should increase your withholding if you have more than one job or you and your spouse both work. You should also increase your withholding if you have income from self-employment or other sources not subject to withholding.
This will protect you from underpayment and save you from having to owe money and potential penalties when you file your tax return. You can use the IRS Tax Withholding Estimator to determine withholdings for other sources of income besides your primary job.
Decreasing Withholding on the New W-4 Form
The IRS suggests that employees should decrease their withholding if they are eligible for any dependent-related income tax credits, such as the child tax credit. You can also reduce your withholding if you are eligible for itemized deductions, deductions for retirement contributions, deductions for student loan interest, or any other deductions other than the basic standard deduction.
The best way to ensure you get the most out of Form W-4 is to work with a trusted advisor who can advise you on the amount of withholding that is right for you.
Get the Help You Need with Form W-4
Getting a new job or experiencing exciting life changes such as the birth of a child or marriage impact your financial situation. You need to accurately reflect those changes when you file your income taxes. The new, simplified Form W-4 is the document that communicates your financial situation and any applicable changes to your employer, who files the form with the IRS and takes your withholding out of your paycheck.
You don’t have to struggle with figuring out the perfect amount to have withheld from your paycheck. Instead, contact Silver Tax Group today to discuss your Form W-4 questions, or speak with an expert about other tax-related questions you might have.