Employees fill out IRS Form W-4 to help employers accurately calculate their federal income tax withholding obligations. Form W-4 is submitted directly to employers, not to the IRS. It asks just a few questions about your filing status, additional income and dependents, as this information affects how much income tax your employer should withhold. Form W-4 was revised for 2020 in an attempt to make it even easier to fill out, but some common questions remain.
What's the Purpose of Form W-4?
Your filing status (single or married and filing separately; married and filing jointly; or head of household), number of dependents and total income affect the standard deduction you're allowed to take when filing your taxes. This means two employees making the exact same wages may not owe the same amount of taxes if one is single and the other is married with three dependent children.
Employers don't know the difference between two such employees unless they ask. Form W-4 ensures this information is collected uniformly and efficiently. Employers then use it to make a more precise estimate of how much income tax to withhold. They are also responsible for paying the withheld income tax directly to the IRS on your behalf.
What Happens if it's Wrong or Missing?
When you file your tax return, the amount of withheld tax is compared to your actual tax liability. If too much tax was withheld, you'll receive a check from the IRS. If your employer underestimated your tax liability and withheld too little, you'll owe the IRS a payment.
If you fail to supply your employer with Form W-4, they will calculate your withholdings as if you are a single filer with no dependents and no additional income. This could lead to an unpleasant surprise if you end up owing the IRS a significant amount of money. On the other hand, if your employer withholds too much of your income, you may not have enough money to care for your family with each paycheck. It's important to fill out Form W-4 to avoid both situations.
Who Fills Out Form W-4?
Only people classified as employees need to fill out Form W-4. Workers who are not considered employees (such as independent contractors or self-employed individuals) do not need to fill out Form W-4 and must manage their own withholdings and pay the IRS themselves.
Not sure if you're considered an employee? Your other tax forms provide a clue. You're an employee if you receive Form W-2 from your employer each year, so you should fill out Form W-4. If you fill out Form 1099 or receive Form W-9 from your employer instead, you're an independent contractor and should not fill out Form W-4.
If you work more than one job, fill out form W-4 if you meet the definition of an employee for at least one of those jobs. According to the IRS, you can choose to include self-employment income as additional income on form W-4, but it may not be computed accurately since this form does not use self-employment tax rates to adjust withholdings. Alternatively, you can use line 4(c) to ask your employer to withhold extra income to help manage the increased tax payments.
What's New in 2020?
The IRS redesigned Form W-4 for the 2020 tax year. Anyone who began earning wages from a company after 2019 needs to fill out the revised version of Form W-4. Preexisting employees who filled out the old version of Form W-4 and have no changes to make (i.e., no new dependents to claim, no change in filing status, no additional income and do not want to request additional withholding) are not required to fill out the revised version. Anyone who does have changes to make should use the new form.
The IRS also removed tax withholding allowances from the new Form W-4. Prior to the 2020 tax year, employees could claim allowances to reduce the amount of income tax withheld by employers. According to the IRS, allowances were removed from the form to make it less confusing to fill out, to increase tax transparency and to improve the accuracy of tax withholding.
Cathy has been writing about finance since 2014 and has been published on sites like The Nest, Bizfluent, Financial Independence Hub, and Credibly. She takes a particular interest in demystifying personal finance questions, like budgeting, tackling debt, and investing for the future.