How to Calculate W4 Exemptions

One of the best things about W-4 exemptions is that they reduce taxable income. The more exemptions you claim on the W-4, the bigger your take-home pay. If you don’t have exemptions, chances are you pay federal income tax on all your wages for the pay period; this causes a drop in your take-home pay. The Internal Revenue Service gives a specific amount for each exemption that you claim on the W-4. To figure exemptions, use your W-4 information and IRS Circular E, the Employer’s Tax Guide.

Go through the W-4 and make sure you’ve claimed the right number of exemptions. Read each requirement from lines A through G and claim only what you’re entitled to. For example, you can’t claim your spouse as a dependent on line D, but you can claim him as an allowance on line C. Depending on your situation, if you don’t want to underpay federal income tax, it’s probably best to not claim your spouse as an allowance. If necessary, use the IRS online withholding calculator to help you fill out the form.

See line 5 of the Employee’s Withholding Allowance Certificate portion of the W-4 for your total exemptions.

Obtain a copy of the Circular E for the tax year in question online. Then, find the “Amount for one withholding allowance” table in the publication. For tax year 2012, see page 35 on the 2012 Circular E for this information.

Multiply your total exemptions by the allowance amount for your pay period. For example, your taxable wages for the weekly pay period equal $480. You claim three allowances on the W-4. At the time of publication, you get $73.08 for one weekly allowance, so your total allowances equal $73.08 times three, which comes to $219.24.

Deduct the allowance total from taxable wages to arrive at wages subject to federal income tax. For example, $480 minus $219.24 equal $260.76, which is your taxable income. You may use the Circular E percentage method table that matches your filing status, pay period and wages after allowances to figure out federal income tax withholding. See pages 36 and 37 of the 2012 version for this data.

Tips

  • At the time of publication, one allowance equals $146.15 for a biweekly payroll; $158.33, semimonthly; $316.67, monthly; $950, quarterly; $1,900, semiannually; and $3,800, annually. The daily equivalent is $14.62.
  • To calculate taxable wages, subtract any pretax benefits that you have, such as cafeteria plans and 401(k) contributions, from gross wages.

Warning

  • If you claim too many allowances on the W-4, you might end up having no, or too little, federal income tax taken out of your paychecks. If you’re not entitled to those allowances, you’ll owe the IRS when you file your tax return.

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