You need to notify your employer of the amount of taxes to withhold from your paychecks based on your filing status, dependents, estimated tax credits, and deductions.
When you start a new job, got a pay raise, or have a significant change in your life that affected your finances, you need to inform your employer by filling out Form W-4, Employee’s Withholding Certificate. By completing the form, you determine the amount of tax your employer will send to the Internal Revenue Services (IRS), the federal tax agency in the United States.
Professionals who earned money need to file their tax returns every year. Therefore, the amount of tax refund you will receive or the tax you will owe will depend on the amount you ask your employer to withhold and send to the IRS every pay period.
Self-employed professionals and independent contractors do not use Form W-4. They are responsible for making estimated quarterly tax payments using Form 1040-ES, Estimated Tax for Individuals, in lieu of withholding.
To avoid owing the federal tax agency and incur penalties due to underpaying taxes, you need to adjust the amount of withholding taxes from your paychecks appropriately. On the other hand. withholding too much tax could result in a substantial tax refund, but could cause budgeting-related problems. It is also as if you are granting the government an interest-free loan when you withhold a hefty amount every pay period. Therefore, it is prudent to compute your accurate withholding tax amount.
Aside from withholding taxes, your employer also withholds money to pay for your Federal Insurance Contributions Act (FICA) taxes to cover Social Security and Medicare. The information you enter on your Form W-4 does not impact the amount for FICA taxes, as they are statutory percentages.
Form W-4, Employee’s Withholding Certificate
Form W-4 is the IRS form to use to inform your employer of the amount of withholding taxes you wish to send to the tax agency. Your withholding taxes count toward your annual income tax bill.
You can also declare yourself exempt from withholding using Form W-4. Doing so would mean your employer will not withhold income taxes from your paycheck. To claim an exemption, you must have no income tax liability in the prior year and do not expect to have a tax liability in the current year.
You can obtain a copy of Form W-4 from the official IRS website to fill out manually. If you wish to complete it electronically for convenience, you can use a document-filler application. You may also hire a tax professional or company to assist you with tax-related concerns and procedures.
All employees, regardless if they work full-time or part-time, receive Form W-4 if their employers need to withhold taxes from their pay.
Filling out Form W-4
The IRS redesigned and introduced a new Form W-4 in 2020, eliminating the option to claim personal allowances. A previous version of the form contains a Personal Allowances Worksheet to assist employees in calculating allowances to claim.
The new version of Form W-4 makes it easier to determine the amount of taxes your employer should withhold.
If you have Form W-4 on file from previous years and do not need to update it, you do not have to complete the 2020 version of Form W-4. If you wish to revise the one you have on file, you must use the new version.
Enter Personal Information
Step 1 requires your personal information. In this section, provide your (item a) full legal name and address, (item b) Social Security number (SSN), and filing status (item c), whether you are Single or Married but filing separately, Married and filing jointly or Qualifying widow or widower, or Head of Household. Only check Head of Household if you are unmarried and pay more than half the costs of keeping up a home for yourself and a qualifying individual.
Make sure that your SSN is correct, as your employer will use it when sending the withheld money to the IRS.
Multiple Jobs or Spouse Works
Step 2 is when you have more than one job at the same time or are married filing jointly and you and your spouse both work, fill out this section. If the conditions apply to you, you have the following options:
- Use the IRS’s online Tax Withholding Estimator.
- Fill out the Multiple Jobs Worksheet on page 3 of Form W-4 and enter the result in Step 4(c).
- Check the box in option C if there are only two jobs total. This option is accurate for jobs with similar pay; otherwise, more tax may be withheld than necessary.
Step 3 is when you have dependents. This section will help you determine credits you may be eligible for. Compute the amount of child tax credit and the tax credit for other dependents that you may be able to claim.
Step 4 allows you to withhold additional money from each paycheck. This optional section has three options:
- Use this section to determine the amount to be withheld from your non-job income. A non-job income may be interest, dividends, or retirement income.
- Fill out this section if you expect to claim deductions other than the standard deduction and want to reduce your withholding.
- Use this section to allow any additional tax you want to be withheld each pay period.
Step 5 requires the date you completed the form and your signature to validate the document.
For the Employers Only section, provide the employer’s name and address, the first date of employment, and Employer Identification Number (EIN).
Keep Form W-4 up to date
You should revisit your Form W-4 at least annually to keep it current. Revisit it more often when a change in income or significant personal life changes happen, including getting married, having a baby, starting to work multiple jobs, or transferring to a new position or job. Manage your money better by ensuring that your employer is withholding the right amount of taxes from your paychecks.