With the IRS changes to Form W-4 in 2020, you no longer claim allowances for yourself and each dependent you have. You do claim dependents on your W-4, which can help you lower your tax liability and/or get a tax credit and refund. Reviewing the steps for filling out your W-4 correctly and claiming dependents will help you avoid penalties, fines and a loss of tax benefits available to you.
How Does a W-4 Work?
When you work as an employee, your employer withholds local, state and federal income taxes and sends them to the various bodies that collect them. Your employer also withholds Social Security and Medicare taxes and sends them to the IRS.
How does adding a dependent affect your paycheck? When you start a new job as an employee, you provide your employer with your name, address, Social Security Number and other information to complete your W-4. This helps your employer determine how much money it needs to take out of your paychecks. For example, if you claim dependents, your employer will take fewer taxes out of your paycheck.
At the end of the year (or by January 31 of the next year), you should receive a W-2 from your employer that details the amount of money you earned and the amount and type of taxes withheld from your paychecks. You use your W-2 to prepare your tax returns and include a copy of the form with your return.
If you are an independent contractor, freelancer, gig worker, small-business owner or sole proprietor, you don’t get a W-2 from companies that pay you, so you don’t fill out a W-4. Instead, you’ll receive a Form 1099 on certain types of income you receive from clients and will need to fill out a W-9.
No taxes are taken out of your payments from these types of clients (unless you don’t fill out a W-9). As a 1099 contract worker, you can still benefit from having dependents and qualify for the Child Tax Credit.
Read More: Child Tax Credit: What Is It & How to Qualify
What Changed in 2020?
Until 2020, you could reduce the amount of taxes taken out of your paychecks by claiming allowances on your W-4. That changed in 2020. Now, you claim dependents on the new Form W-4.
If you are an employee for two different employers, you only claim dependents on one of your W-4s – the one for the highest-paying of the two jobs. If you filled out your W-4 before 2020, you don’t have to update it or file a new one.
Read More: What's Different About the 2021 Child Tax Credit?
Who Qualifies as a Dependent?
You’ll need to make sure anyone you claim as a dependent qualifies. You can claim dependents based on a variety of factors, such as a child’s age, their relationship to you, if you pay more than 50 percent of their household expenses, your filing status (such as head of household) or if you’re caring for a qualifying parent.
To check to see if someone you want to claim as a dependent qualifies, you can refer to IRS Publication 501 for more information. Based on the number of qualifying dependents you claim, you can benefit from the Child Tax Credit and deduct other child care expenses. Factors such as your income and filing status come into play, so make sure to work with a tax professional to get your dependent claims, deductions and tax credits correct.
Steve Milano has written more than 1,000 pieces of personal finance and frugal living articles for dozens of websites, including Motley Fool, Zacks, Bankrate, Quickbooks, SmartyCents, Knew Money, Don't Waste Your Money and Credit Card Ideas, as well as his own websites.