Completing Form W-4, Employee Withholding Certificate

Form W-4, Employee’s Withholding Certificate, is the form you give your employer to help determine how much Federal income tax should be withheld from each paycheck. In the lesson “How Your Paycheck Works,” we discussed how the amount of Federal income tax withheld from your pay is largely based on the information and elections you provide on Form W-4.

We also discussed why it is important to complete this form thoughtfully. Withholding too little could leave you with an unexpected tax bill at the end of the year, while withholding too much means you are unnecessarily reducing your take-home pay throughout the year. Taking the time to understand and properly complete Form W-4 can help you strike the right balance.

A copy of Form W-4, Employee’s Withholding Certificate, is included at the end of this lesson so you can follow along with the step-by-step instructions and discussion below. The official Internal Revenue Service instructions are also included with the form; however, those instructions explain the mechanics of completing the form and do not provide individualized advice about which elections are appropriate for your particular tax situation.

Form W-4 has five possible steps to complete.

• Step 1 — Enter Personal Information

• Step 2 — Multiple Jobs or Spouse Works

• Step 3 — Claim Dependents and Other Credits

• Step 4(a) — Other Income

• Step 4(b) — Deductions

• Step 4(c) — Extra Withholding

• Step 5 — Sign Here

Can I Complete Only Steps 1 and 5?

Yes. For many employees with a simple tax situation, completing a Form W-4 may be very straightforward. If you complete Step 1 (Personal Information) and Step 5 (Signature) and leave Steps 2 through 4 blank, your employer’s payroll software will calculate Federal income tax withholding based primarily on your filing status and wages.

This may be appropriate if you have one job, no significant income from other sources, no special deductions or credits you want reflected in your withholding, and your spouse does not work if you are married filing jointly. However, your W-4 should reflect your individual circumstances, so walk through each step to make sure you complete (or leave blank) all applicable sections.

How to Complete Form W-4

You generally complete a Form W-4 when you start a new job. You may also submit a new W-4 to your employer when your personal or financial circumstances change, discussed later in this lesson.

Let’s walk through each section of Form W-4 and discuss how to complete it. The IRS provides instructions with the form, but those instructions primarily focus on what to enter. Our discussion will also explain why certain information is requested and how your choices can affect the amount of Federal income tax withheld from your paycheck.

The form is divided into five steps. Everyone completes Steps 1 and 5. Only complete Steps 2, 3, and 4 if they apply to you; otherwise, leave them blank.

Step 1 — Enter Personal Information

Step 1(a): Name and Address

Enter your:

• First name and middle initial

• Last name

• Home address

• City or town, state, and ZIP code

Step 1(b): Social Security Number

Enter your Social Security number. Make sure your name matches the name associated with your Social Security number.

Step 1(c): Filing Status

Check one of the three boxes:

• Single or Married filing separately: Choose this if you expect to file your tax return as Single or Married Filing Separately.

• Married filing jointly or Qualifying surviving spouse: Choose this if you are married and expect to file a joint tax return with your spouse, or if you qualify as a surviving spouse.

• Head of household: Generally, choose this only if you are unmarried and pay more than half the cost of maintaining a home for yourself and a qualifying individual.

Your selection matters because your employer uses the filing status you select to determine the tax rates and standard deduction used in calculating your withholding.

Step 2 — Multiple Jobs or Spouse Works

Complete Step 2 if:

• You have more than one job at the same time, OR

• You are married filing jointly and your spouse also works.

You have three options.

• Option 2(a): Use the IRS Tax Withholding Estimator on www.irs.gov. You can use the IRS Tax Withholding Estimator to calculate your withholding. This is generally the most precise option, particularly when you and your spouse have multiple jobs or the jobs pay significantly different amounts.

• Option 2(b): Use the Multiple Jobs Worksheet. The W-4 includes a Multiple Jobs Worksheet. Complete the worksheet and enter the resulting amount in Step 4(c). This option may be useful when you do not want to use the online estimator.

• Option 2(c): Check the Box. If there are only two jobs total, you may check the box in Step 2(c). You might have two jobs, or you might have one job and your spouse has one job. This “Check the Box” option generally works best when the pay from the two jobs is reasonably similar.

If you use this option, Step 2(c) should be checked on the Form W-4 for both jobs. So, if you have two jobs, check Step 2(c) on the W-4 you give to the employer for your first job and the W-4 you give to employer for your second job.

If you and your spouse each have one job, check Step 2(c) on your W-4, and your spouse should check Step 2(c) on their W-4.

If Step 2 does not apply to you, leave it blank.

Step 3 — Claim Dependents and Other Credits

Step 3 allows certain anticipated tax credits to be taken into consideration when your employer calculates your withholding. Follow the instructions and the “if your total income” thresholds printed on the current W-4. Enter the applicable amount for your qualifying children. Then enter the applicable amount for other dependents.

Step 3 may also be used for Federal tax credits other than the Child Tax Credit and Credit for Other Dependents, such as certain education, retirement savings, dependent care, or other credits for which you qualify. Because available tax credits and eligibility requirements can change, use the IRS Tax Withholding Estimator for assistance in determining the credits that may apply to you and the appropriate amount to include in Step 3.

Add these amounts together and enter the total dollar amount on Step 3 which generally reduces the amount of Federal income tax withheld from your paychecks. It does not mean your employer is paying you a tax credit. Instead, the payroll withholding calculation takes the credits you expect to claim into consideration.

If Step 3 does not apply to you, leave it blank.

Step 4 — Other Adjustments

Step 4 is optional. It contains three separate adjustments: 4(a), 4(b), and 4(c).

Step 4(a): Other Income

Enter other income you expect to receive during the year that will not have Federal income tax withheld from it if you want your employer to account for that income when calculating your Federal tax withholding. Examples could include interest, dividends, and retirement income. Do not include income from another job here. Entering an amount in 4(a) generally increases your Federal income tax withholding.

If this does not apply to you, leave it blank.

Step 4(b): Deductions

Complete this line if you expect to claim deductions that you want taken into consideration when calculating your withholding. Use the Deductions Worksheet included with Form W-4 to determine the amount to enter. Entering an amount on 4(b) generally reduces your Federal income tax withholding.

If you do not have an amount to enter, leave it blank.

Step 4(c): Extra Withholding

Enter any additional Federal income tax you want withheld from each paycheck. This is a dollar amount per pay period, not an annual amount. For example, if your normal payroll calculation would withhold $175 and you enter $25 on Step 4(c), approximately $200 would be withheld from each paycheck. This line can be useful if you want additional tax withheld because you expect your regular withholding may not be enough.

If you do not want additional withholding, leave it blank.

Step 5 — Sign Here

Sign and date the form and give the completed Form W-4 to your employer.

When Should You Update Your Form W-4?

Your Form W-4 is not necessarily something you complete once and forget about. Your tax situation can change over time, and your withholding should change with it.

Consider reviewing and, if necessary, submitting a new Form W-4 when:

• You start a new job.

• You get married, divorced, or separated.

• You or your spouse start or stop working.

• You or your spouse take on a second job.

• You have or adopt a child.

• Your income increases or decreases significantly.

• Your deductions or tax credits change significantly.

• You owed a significant amount of tax when you filed your return.

• You received a much larger refund than you wanted.

• Tax laws change in a way that affects your individual tax situation.

• You begin earning substantial income that does not have taxes withheld, such as investment, self-employment, rental, or other income.

It is also a good idea to review your withholding at the beginning of each year, even if nothing obvious has changed. The IRS recommends checking your withholding every January to make sure it is appropriate for the year ahead.

You Can Submit a New W-4 During the Year

You are not locked into the W-4 you completed when you were hired. If you determine that too much or too little Federal income tax is being withheld, you can generally complete a new Form W-4 and give it to your employer

Your new W-4 replaces the previous one and tells your employer how to calculate your Federal income tax withholding going forward. It does not change taxes that have already been withheld from previous paychecks.

Check Your Actual Paycheck

After submitting a new W-4, review one of your subsequent paychecks to see how the change affected your Federal income tax withholding. Do not assume that completing a new W-4 produced the result you expected.

Common Form W-4 Mistakes

Form W-4 is relatively short, but the choices you make can have a significant effect on your paycheck and the amount of tax you may owe or receive as a refund when you file your tax return.

Here are some common mistakes to avoid:

• Forgetting about a spouse’s income or a second job. If you are married and both spouses work, or if you have more than one job at the same time, your withholding may need to account for the combined income. Ignoring the additional income can result in too little tax being withheld.

• Misunderstanding Step 3—Claim Dependents and Other Credits. The amounts entered in Step 3 are used to reduce the amount of Federal income tax withheld from your paycheck. They are not additional amounts being withheld. Entering an amount here without understanding its effect could cause too little tax to be withheld.

• Misunderstanding Step 4(c)—Extra Withholding. Step 4(c) is for an additional amount you want withheld from each paycheck. For example, entering $100 in Step 4(c) generally means $100 will be withheld in addition to the Federal income tax otherwise calculated from your W-4.

• Assuming you must complete a new W-4 every year. You generally do not need to submit a new W-4 simply because a new calendar year begins. Your existing W-4 generally remains in effect until you provide your employer with a new one. However, reviewing your withholding at least annually is a good habit.

• Claiming “Exempt” without qualifying. Writing “Exempt” on Form W-4 is not simply a way to choose to have no Federal income tax withheld. You must meet the IRS requirements to claim exemption from withholding. If you claim exempt status when you do not qualify, you could end up owing Federal income tax—and possibly penalties— when you file your return.

• Completing the W-4 and never looking at your paycheck. Always review your paycheck after submitting or changing a W-4. Look at the amount of Federal income tax withheld and make sure the result is reasonably consistent with what you intended.

Final Thoughts

Your employer uses the information you provide on Form W-4 to calculate how much Federal income tax to withhold from your paycheck. However, your employer is not responsible for determining whether the choices you make are right for your personal tax situation. That responsibility belongs to you.

The good news is that you don't have to be a tax expert to make informed decisions. A little knowledge and a willingness to ask questions can go a long way. Take the time to understand your selections, review your withholding periodically, and make adjustments as your life and financial circumstances change.

Remember, the decisions you make completing your W-4 can help you avoid unwelcome surprises at tax time.

You've got this!

Very truly yours,

Aunt Anna