Updated for Tax Year 2014
Used by your employer to determine the amount of taxes to withhold from your paycheck, the W-4 Form can help you out at tax time. Here are the details.
The W-4 is an Internal Revenue Service (IRS) form you complete to let your employer know how much money to withhold from your paycheck for federal taxes. Accurately completing your W-4 can ensure you don't have a big balance due at tax time. It can also prevent you from overpaying your taxes, putting more money in your pocket during the year.
The W-4 is based on the idea of "allowances." The more allowances you claim, the less money your employer will withhold for taxes. You get one allowance for yourself, one for your spouse and one for each dependent you report on your tax return. You can claim additional allowances in certain cases such as planning to itemize your deductions when preparing your return, your filing status is "head of household" or if you’re eligible to claim a tax credit for child care expenses.
Requesting additional withholding
The W-4 also helps you determine whether you need extra money withheld from your pay. If you work more than one job, have self-employment income or if your spouse earns income too, the personal allowance worksheet on Form W-4 will not incorporate this other income into your allowances, and too little will be withheld. This is because the additional income that you end up reporting on your tax return may put you in a higher tax bracket. By voluntarily increasing your tax withholding on the W-4, you can avoid having to make an additional lump-sum tax payment when you file.
Filling out the W-4
W-4 form, otherwise known as Employee's Withholding Allowance Certificate, includes a series of worksheets you can use to calculate the appropriate number of allowances to claim. This includes a separate worksheet for taxpayers who have a working spouse or earn other types of income.
After calculating your allowances, you must provide some personal information and report your total allowances and additional withholding amounts on the actual form. You must tear off this certificate and provide it to your employer.
Exemption from tax withholding
You can also use the W-4 to declare yourself exempt from withholding, meaning your employer will not reduce your salary for any federal income tax. You can claim an exemption from withholding only if you had no income tax liability in the prior year and you don’t expect to owe any tax in the current year.
For example, if you are a single taxpayer who earns approximately $8,000 every year, then you will not owe federal income tax because of the personal exemption and standard deduction you can claim on your tax return, which effectively eliminates the possibility of owing tax on your $8,000 of earnings.
Updating your W-4
The IRS recommends that if you work more than one job, or if you and your spouse both work, that you claim all your allowances on the W-4 for the highest-paying job and claim zero allowances on the W-4 forms for all other jobs. It also suggests that taxpayers consider completing a new W-4 every time a major life event occurs, such as a marriage, the birth or adoption of a child or a spouse getting or losing a job. These things can have a direct effect on the amount of tax you owe, so your W-4 should account for them.