Unraveling the Mystery of Form W-4
With all of the tax forms out there, keeping them straight can be a challenge. So, when your employer hands you a W-4 form to fill out what should you do?
A W-4 is an IRS tax document that employers use to calculate how much tax to withhold from employee’s paychecks. If you have ever experienced a larger than expected tax bill from under withholding in the past, you may understand the importance of accuracy on the W-4 form.
For many years, the W-4 form was relatively unchanged. Most people are familiar with the old form where the number of withholding allowances you claimed determined how much tax was withheld. This changed when the IRS released an updated W-4 in 2020 to be more in line with the tax law changes that took effect in 2018. Gone was the old version that everyone was familiar with. The IRS billed its replacement as a simpler version.
While for most people, the new form is simpler, it has created some confusion for others who were used to the old version. The new form is still easy to fill out if you focus on the important steps.
Step 1 – This is where you enter your basic personal information. It will also ask for your tax filing status. Usually this does not change from year to year unless there is material change such as getting married. Your tax filing status for the entire year will be the same as the last day of the year. For example, if you were married December 31st, your tax filing status would be married filing joint (or separate) for the entire year. It is important to designate a selection in the box on Step 1, Part C. Please note that most single taxpayers with minimal income from sources other than wages do not need to complete any additional steps. They just need to sign the form in Section 5. Completing the form in this manner should result in minimal tax due/overpayment when filing your tax return.
Step 2 – This step is designed to consider other income streams when calculating your tax withholding. Be sure to fill out the checkbox on the bottom right of Step 2 if you selected married filing joint in Step 1 and your spouse works or if you are single and have multiple jobs.
Alternatively for married couples both working, they could each select married filing separately in Step 1, Part C. The box in Step 2 would not need to be filled out if there were no other forms of income.
Step 3 – This is where you can adjust your payroll tax withholding for any dependents you will claim on your tax return. Claiming dependents will effectively reduce your withholding by any dependent credits you may be eligible for. If you choose not to complete this section, the outcome will typically be a larger refund when you file your tax return. If you choose to complete this section, It is important for married taxpayers that only one person claim each dependent on the W-4. If a married couple with two kids each claim two dependents on their W-4, they could end up with a significant balance due when filing their tax return.
Step 4 – Here you have the option to further refine your tax withholdings. This step is not required and would be wise to consult your tax advisor if you choose to complete it. However, if your goal is just to have an additional flat amount withheld every paycheck, you can add this on Line 4(c).
One final note. If you are assisting your minor children with filling out this form and you expect their wages and other income will likely not be enough to subject them to tax (less than $14,600 for 2024), it may be wise to file them as exempt by writing “EXEMPT” under Line 4c. This ensures that no tax will be withheld and eliminates the need for the child to file a tax return in order to claim a refund that they may be entitled to.
W-4s are provided when you start a new job, so you do not have to fill one out every year. It is still a good idea to review your tax withholding periodically and as you experience life changes such as new dependents. As always, if you have questions on how life changes and adjustments to your W-4 will impact your tax withholding, it is best to consult your tax advisor.
