How you fill out your W-4 will determine how much tax is withheld from your pay
Filling out a Form W-4 [Employee’s Withholding Allowance Certificate] is one of the first things you have to do when you get a new job. This form is essential to filing your taxes correctly because it determines how much tax will be withheld from your pay.
The first half of the form is pretty easy. You just have to fill in your name, address, and marital status.
Then you have to figure out how many allowances to claim. This number will determine the amount of your withholding.
Generally the number of allowances you should claim will correspond to the number of personal and dependency exemptions you can claim on your tax return, but this is not always the case. Claiming zero allowances will result in the maximum amount of tax withheld. Every additional allowance you claim on top of that means that a little less tax is withheld.
So if you can be claimed as a dependent on someone else’s tax return, should claim zero allowances. When you’re a dependent, the person who claims you gets the benefit of your personal exemption and you yourself will end up owing slightly more in taxes. Hence, tax should be withheld at the maximum rate of zero allowances.
For single people with one job the allowances to exemptions ration doesn’t exactly hold true. Most single people claim one allowance, however, this is likely to result in a refund. Claiming two allowances would probably get them closer to your exact tax liability, but may actually result in some tax due. Essentially you can choose whether to claim one or two, depending on the rest of your tax situation, but it’s probably safer to claim one.
If you are married you should claim two allowances, if you are married with one child you should claim three allowances, if you are married with two children you should claim four allowances, etc.
If you’re confused about how many allowances you should claim, the IRS provides a Personal Allowances Worksheet right on the first page of the W-4.
Things get a little more complicated if you have multiple jobs, your spouse works, or you intend to itemize your deductions. In these cases you should turn your attention to page two of the W-4 for the Deductions and Adjustments Worksheet and the Two-Earners/Multiple Jobs Worksheet. The IRS also has a withholding calculator on their website that can give you the most accurate information on how many allowances to claim.
The last thing you need to do is figure out if you are exempt from withholding. Most people are not exempt from withholding. Essentially you are only exempt from withholding if you aren’t a dependent, you had the right to a refund of all income tax withheld last year, and you aren’t required to file a return this year. If you are exempt, you can write exempt in line seven.
Now you’re done! All you have to do now is sign the form.
Even if you’ve been at your job for a while, it’s a good idea to check and if necessary update your W-4 every year, especially if there’s been a major event in your life such as a marriage or the birth of a child.
The goal is to get your refund or tax due as close to $0 as possible. Getting a big refund when you file taxes is a great feeling, but that can also mean that your withholding needs to be adjusted. The reality is that you could be enjoying that money throughout the whole year.
Photo via 401(K) 2013 on Flickr.