As all teenagers discover when they receive their first paycheck from their first job, the amount of the check seems to be missing some of the pay they earned. Their excitement about becoming a member of the workforce quickly turns into a disappointing lesson about reality. And we’ve all experienced this disappointment because of the difference between the total pay we earn and what we actually receive in our paychecks – our “take-home pay.” Part of this discrepancy is because of the IRS pay-as-you-go income tax structure. If you work for an employer, you’ll pay taxes on your earnings as you receive them throughout the tax year instead of staring at one large tax bill at the end of the year. A short 10-field form that you give your employer is what sets this pay-as-you-go plan in motion – the W-4 form (Employee’s Withholding Allowance Certificate).
W-4 Form Explained
When you started a new job, the W-4 form was probably part of your new employee packet. Nestled between paperwork that may have included your company’s policies and procedures, a staff phone listing and a cheery welcome-to-the-company letter, the W-4 was waiting for you to fill it out. Your employer may have wanted you to submit this form even before you began work on your very first day, because the payroll department needed the information it contained before generating your paychecks. Your employer's deadline for implementing your W-4 form is the beginning of your payroll period that ends 30 days after you submit this form.
Essentially, you were letting your employer know how much tax to withhold from each paycheck in compliance with the IRS pay-as-you-go tax structure. But when you fill out a W-4, you don’t submit a dollar amount or even a percentage of your wages for the tax you want your employer to withhold. The withheld tax amount is based on other key information that you submit such as your marital filing status and the number of allowances you’re claiming. It’s this information that your employer uses to calculate the amount of tax that will be paid from each of your checks.
The IRS does not use the W-4 you fill out to determine your tax liability, which is the actual amount of income tax you’ll owe. W-4 forms are simply used by employers to calculate your payroll withholding amount.
Understanding W-4's Relationship to W-2
Before you file your tax return each year, your employer gives you another form that's partially populated by the data you submit on your W-4. Form W-2 (Wage and Tax Statement) is a snapshot of your income history with your employer during a tax year. Included on this form is a line-item accounting of the total amount of taxes your employer withheld from your wages. This amount is the sum of the individual amounts that were withheld from each of your paychecks, which your employer computed based on the W-4 that you filled out.
Filling Out Your W-4
At first glance, filling out your W-4 looks like a breeze. This brief form simply helps you work in tandem with your employer to help estimate how much taxes you’ll pay from each paycheck, which ultimately determines the amount of your take-home pay. The first three fields are the easiest to fill out because here you'll provide your name, address, Social Security number and marital status. The fourth field has a box to check if your name is different than what's shown on your Social Security card. So far, so good. But by the time you move to the fifth field, you may experience a bit of a stall, which trips up many taxpayers. It’s the word that is part of this form’s name – allowances.
W-4 Form Allowances Explained
Withholding allowance is the phrase used to describe how the IRS allows taxpayers to have less in income tax withheld from each paycheck. For each allowance you claim, your employer withholds less money from your check, which gives you more take-home pay. The reason for granting allowances is not simply to allow you more take-home pay, particularly if this results in your owing a big tax bill balance at the end of the year. The goal of withholding allowances is to more closely offset your annual tax liability by the periodic tax payments you make throughout the year.
The number of allowances you take is determined by factors such as your income, marital status and the number of dependents you have. And figuring the number of your allowances is a little like working a simple mathematical equation. But you don’t have to be a math expert to compute this number. The IRS helps by providing a Personal Allowances Worksheet with each W-4, which should be part of the paperwork that your employer gives you. If you don’t have a worksheet, visit IRS.gov/forms and enter Form W-4 in the search field. Click on this form title when the page loads.
Using W-4's Three Worksheets
In addition to the Personal Allowances Worksheet, Form W-4 also includes two other worksheets. These three worksheets help guide you through the line-by-line calculations that determine the amounts you’ll enter on lines 5 and 6 of the W-4.
- Personal Allowances Worksheet. Lines A through D prompt you to enter the number of allowances you're claiming, which are primarily determined by your filing status. There’s also consideration for claiming additional allowances if you have more than one job and if your spouse has a job. If you have children, you’ll also be able to claim allowances for each eligible child on Line E. The number of allowances you claim is based on your filing status and income. Line F allows you to take allowance credits for eligible dependents other than children. IRS Publication 505 (Tax Withholding and Estimated Tax) offers more information about qualifying children and other dependents. You can download this publication at IRS.gov. Publication 505 also contains Worksheet 1-6 to help you determine if you can take any credits for other allowances.
- Deductions, Adjustments, and Additional Income Worksheet. You’ll only use this worksheet if you’re itemizing deductions, claiming certain income adjustments or including a significant amount of non-wage income. Itemized deductions include charitable contributions, qualifying home mortgage loan interest, certain state and local taxes and qualifying medical expenses. Publication 505 helps you determine these deductions.
- Two Earners/Multiple Jobs Worksheet. As you’re working through the Personal Allowances Worksheet, line H may require a little adjustment based on whether you have more than one job and your total income from all jobs is more than $52,000 (or if you and your spouse both work for a combined income of more than $24,000). If either of these conditions fits your situation, complete the Two Earners/Multiple Jobs Worksheet to fine-tune your Personal Allowances Worksheet.
W-4 Exemption vs. Personal Exemption
Form W-4 instructions include a provision for exemption from withholding. This is not the same as a personal exemption or a dependent exemption, which the Tax Cuts and Jobs Act suspended beginning with the 2018 tax year and extending through 2025. These two types of exemptions represent dollar amounts that reduce your tax liability. Exemption from withholding means that you may be eligible to have no federal income taxes withheld from your paychecks.
For 2018, you can only claim exemption from withholding if you had no tax liability in 2017, which means you were eligible to a full refund of all federal income tax that was withheld. And you must also be expecting a full refund of withheld income tax in 2018 because of no anticipated tax liability for this year. If you meet both these conditions for exemption from withholding, you don’t need to fill in lines 5 and 6 of your W-4. You’ll simply write “exempt” on line 7. Publication 505 goes into further detail about qualifying for the withholding exemption.
Adjusting Your W-4
There are many twists and turns in life that affect your finances as well as your tax withholding status. If you’re recently married – or divorced – or if you begin a second job or your spouse discontinues a job, it’s time to re-evaluate your W-4 information. Your goal is to align the amount that’s withheld from your paychecks as close as possible with the actual taxes you’ll owe so you won’t have an inordinately large refund – or large tax bill – waiting for you at the end of the tax year.
At any time during the tax year, you can ask your employer for a new Form W-4, or you can download this form at IRS.gov. Fill it out again to determine if your new life situation warrants increasing or decreasing the number of withholding allowances you formerly submitted to your employer. If there is a change, simply submit the revised W-4 to your employer.
You can also use the IRS online withholding calculator, which offers an automated paycheck check-up. Visit IRS.gov and type tax withholding calculator into the search field to access this online tool. This calculator is accurate for most taxpayers, but if your tax situation is more complicated than the norm, you may need to consult a tax professional or use the guidelines in Publication 505 to compute your withholding allowances.
You may need to adjust your W-4 withholding in these five scenarios:
- You get married or divorced. When you get married, you'll choose whether to file your income tax return as married filing separately or married filing jointly. But if you file jointly with your spouse, you’ll likely qualify for more deductions and a lower tax rate. Conversely, if your filing status changes from married to single, you may lose many of your tax benefits. Regardless of which way your marital status pendulum swings during a tax year, this is definitely a time to revisit your W-4 calculations and perhaps adjust your number of allowances.
- You welcome a new baby into the family. Whether your new baby is born into your family, welcomed through adoption or fostered, you’ll adjust your W-4 withholding to reflect the additional dependent allowance. You may also qualify for certain tax credits such as the child tax credit. Table 1-2 in Publication 505 offers information on this tax credit as well as other tax credits.
- You (or your spouse) begin a second job. Additional jobs mean additional income, which may bump you into the next tax bracket. You may start an additional job working for an employer, or you may start a side hustle as you build your own business. Ensuring that your withholding allowances are correct can help you avoid an unwelcome tax surprise at the end of the year.
- You (or your spouse) lose your job. The loss of a job means loss of income, which you may recoup fairly quickly (if you get a new job soon after the loss of your former job). But if you remain unemployed for much of the year, you may have had too much tax withheld from your paychecks.
- You (or your spouse) get a new job or change jobs. Any change in a job situation is a reason to revisit your W-4 withholding allowances, regardless of whether your income increases or decreases.
- IRS: Pay as You Go, So You Won't Owe - A Guide to Withholding, Estimated Taxes, and Ways to Avoid the Estimated Tax Penalty
- IRS: Form W-4 (2018)
- IRS: Publication 505
- Intuit TurboTax: Top 5 Reasons to Adjust Your W-4 Withholding
- IRS: Withholding Calculator
- Internal Revenue Service. "Topic No. 753 Form W-4 – Employee's Withholding Certificate." Accessed Sept. 22, 2020.
Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.