Starting a new job always seems to involve a lot of paperwork, but one form you shouldn't gloss over is the W-4. The W-4 helps your employer determine how much income tax should be withheld from your paychecks and how much you get to take home. Only employees are subject to income tax withholding, so if you work as an independent contractor you won't need to complete a W-4.
The W-4 itself doesn't require that much information. Besides your name, address and Social Security number, you also have to specify whether you file as single or married. However, if you prefer to have extra withheld even though you're married, you can check a third box to have your employer withhold taxes as if you paid the higher single rate. Report the total number of allowances you claim on line 5. Each allowance reduces your withholding and increases your take-home pay. On line 6, you can elect to have additional amounts withheld from each paycheck. Finally, if you had no tax liability the previous year and expect to have no tax liability for the current year, you can skip lines 5 and 6 and write "exempt" on line 7. However, don't lie: If you write exempt when you actually owe income taxes, you could end up facing extra taxes and penalties.
Figuring Your Allowances
The Personal Allowances Worksheet is the simplest way to calculate W-4 allowances. The worksheet lists a number of criteria, such as how many people, including yourself, you can claim as a dependent, and expenses you incur for child care, that helps you figure the number of allowances to claim to make your withholding approximately equal to your tax bill.
The IRS also allows you to figure your allowances with two alternate worksheets if you claim lots of tax deductions or work multiple jobs. Use the Deductions and Adjustments Worksheet if you plan to claim lots of tax deductions. For example, you might qualify for more allowances with the Deductions and Adjustments Worksheet if you have a large mortgage interest deduction, traditional IRA contributions and significant charitable donations.
The Two-Earners/Multiple Jobs Worksheet provides a more accurate amount of allowances if you work multiple jobs or your spouse also works. When you work multiple jobs, you can end up with too little withheld because each employer or payroll office withholds less individually than a single job paying the same amount would withhold. Generally, claim all your allowances on the W-4 for your highest paying job and claim zero for your other jobs.
How Many Allowances
Just because one of the worksheets says you're entitled to claim a certain number of allowances doesn't mean you have to take them all. You can claim fewer allowances, but don't get greedy and claim extra. If you more each paycheck, but a smaller tax refund come tax time, claim all the allowances you're entitled to take. However, if you prefer to surprise yourself with a larger tax refund, claim fewer allowances on line 5 of the W-4. In addition, if you've got other income that isn't affected by withholding, like interest or dividends, you can avoid making estimated tax payments by specifying that your employer withhold extra from each paycheck by reporting that amount on line 6 of your W-4.
Changing Your W-4
Life changes, and as it does, so should your W-4. After certain life events, you should complete a new W-4 so that your withholding stays accurate. For example, if you get married, you can have taxes withheld at the lower married rates. Similarly, if you have a child, you can decrease your withholding by claiming an additional allowance. On the flip side, if Mr. Right turns into Mr. Wrong and you get divorced, you must inform your employer so that you have enough money withheld. Similarly, when your grows up and leaves the nest so you can't claim her as a dependent, you must claim one less allowance, which increases your withholding.
- Creatas/Creatas/Getty Images