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What is a W-4 Form?

definition

The W-4 is an Internal Revenue Service (IRS) form that new employees fill out to let their employers know how much tax to withhold from the employee’s paycheck each pay period.

🤔 Understanding W-4 forms

The federal government requires that all new employees (not independent contractors) fill out a W-4 when they start a job. When you fill out a W-4, you give your employer certain valuable information which helps determine how much money your employer should withhold from each paycheck for tax purposes. The employer sends that withheld amount to the Internal Revenue Service (IRS) on your behalf. At the end of the tax year, the IRS assesses the tax withholdings to figure out how much you’ve already paid them and whether that matches the annual income tax you owe. By adding or removing certain personal information (such as the number of dependents or other jobs you have), you can change the amount of tax that comes out of your paycheck. The only part of the W-4 form that is mandatory is the first step, where you enter your personal information, like your name and filing status. If you only fill out this section and leave the rest blank, your withholding will be calculated assuming no other adjustments for dependents or deductions. This information helps the IRS determine whether or not you get a tax refund at the end of the year.

example

Let’s say Sarah starts a new job in accounting. On her first day, Sarah’s employer has her fill out a W-4 form. Because she has kids to support at home, Sarah wants to make sure she takes home as much of the money in her paycheck as possible. So she indicates on her W-4 form that she has dependents. Sarah’s employer then uses the information in her W-4 to figure out how much money to withhold from each of her paychecks for income taxes. Sarah may not get a big tax refund, but she’ll have more money each month to pay her bills and care for her kids.

Takeaway

A W-4 form is like an instruction manual…

When you fill out your W-4, you give your employer specific instructions on how much tax to withhold from your paycheck each pay period. The employer then takes that amount out of your paycheck and sends it along to the IRS. Ideally, you’ve given them accurate instructions so you don’t end up with a big tax bill at the end of the year.

Tell me more...

How is a W-4 form used?
How do I fill out the W-4 form?
What is the difference between a W-4 form and a W-2 form? A W-4 and a W-9?

How is a W-4 form used?

The Internal Revenue Service (IRS) collects income taxes on a pay-as-you-earn basis. Typically, as you earn your wages or salary throughout the year, your employer takes a portion of each paycheck and sends it to the IRS for federal income taxes. The purpose of a W-4 form is to provide your employer with the information they need to withhold the appropriate amount of federal income tax on your behalf.

The information you put on your W-4 form can have significant financial implications. If you have too little money withheld throughout the year, you could end up paying a large federal income tax bill at the year’s end. And depending on how much you owe, you could end up paying a penalty for underpaying your taxes. (You probably won’t have to pay the penalty as long as your total tax liability is less than $1,000 after accounting for your withholdings and credits. You could also avoid paying the penalty if you’ve paid at least 90% of your tax bill for the current year or 100% of the taxes you owed the previous year (whichever amount is smaller).

But there are also consequences for having too much tax withheld throughout the year. While it might feel like a windfall to get a tax refund, keep in mind that it’s a refund — You’re receiving it because you’ve already paid the government more than you owe. It’s kind of like you gave the government an interest-free loan, when that money may have been more useful to you earlier in the year.

For these reasons, you may want to put considerable thought into filling out your W-4 form. It’s also a good idea to fill out a new form when you go through significant life changes, like getting married or having a child. Such changes can affect the amount you owe in taxes, so you may want to keep your W-4 form up-to-date.

How do I fill out the W-4 form?

The W-4 is one of the many papers you fill out when you start a new job. The Internal Revenue Service (IRS) mandates that all new employees fill out a W-4. The form can seem confusing at first, so it’s easier to break it down into steps. (Read on for a step-by-step guide, below.)

Is there a new form for 2020?

Before we dive into how to fill out a W-4 form, it’s worth noting that the IRS has released a new form for 2020. According to the IRS, this is the first significant redesign the form has seen since 1987. The agency updated the form to reflect recent substantial changes to the tax code. The new version is supposed to simplify the form and make the withholding system easier to understand, while still allowing you to convey the same valuable information to employers and the IRS.

Part of what prompted the form update was the Tax Cut and Jobs Act (TCJA), passed in December 2017. One fundamental change to the W-4 form is the elimination of allowances starting in tax year 2019. Allowances were tied to the personal exemption, which the TCJA got rid of. Previously, employees could claim an exemption for themselves and each of their dependents. For the 2018 tax year, this exemption was $4,150.

The major tax reform eliminated the personal exemption, effective starting in 2019, and instead increased the standard deduction and the child tax credit. The standard deduction for 2020 is $12,400 for single taxpayers and those married but filing separately, $24,800 for those married and filing jointly, and $18,650 for heads of households. The child tax credit in 2020 of up to $2,000 per qualifying child.

It’s also important to note that the latest changes to the personal exemption, standard deduction, and child tax credits will phase out after 2025 — Assuming Congress doesn’t implement new reforms.

You don’t necessarily have to fill out the new version of the W-4 if you’ve already filled one out for your current employer. Your employer will be able to determine your withholding based on the information you’ve already filled out. But if you want to make sure your information is accurate and up-to-date, you might want to fill the new one. And if you start a new job in 2020, you’ll have to use the new form.

Step-by-step directions

The new W-4 form features a relatively simple 5-step process. The simpler your tax situation, the simpler the form will be to fill out. According to the IRS website, you only have to fill out the parts that are relevant to your situation. For example, if all you do is fill out the first line and sign your name, then your employer will just use the standard deduction and your income to determine your withholding.

Here are the steps to fill out the new W-4 form:

Step 1: Personal Information — Enter your personal information. This includes:

  • Your first, middle, and last name
  • Your address, including your street address, city or town, state, and zip code
  • Your tax filing status (single, married filing jointly, married filing separately, or head of household)
  • Your Social Security Number

Step 2: Multiple Jobs or Spouse Works — You’ll need to complete this section if you have a second job or if you have a spouse who has a job. The purpose of the W-4 form is to make sure your tax withholding is as accurate as possible based on your current circumstances. If you fail to mention your spouse’s job or your second job, you may receive a big tax bill at the end of the year because your employer didn’t withhold enough to account for your higher income.

To get a sense of how much your employer should withhold, you can use the IRS’s online tax withholding estimator, the Multiple Jobs Worksheet on page 3 of the W-4 form, or check a box to indicate that your household has two jobs that have similar pay.

The IRS recommends you use its withholding calculator if:

  • You want to maintain privacy (meaning you don’t want to share information about other jobs with your employer)
  • You expect to work only part of the year
  • You have dividend or capital gains income
  • You have self-employment income

The IRS states that using their tax withholding estimator will give you the most accurate withholding for those with multiple jobs. If you prefer not to use the tax withholding estimator, you can use the Multiple Jobs Worksheet. In the worksheet, you’ll use the income tables the IRS provides to find the correct amounts to enter into each box. Keep in mind, though, that the IRS says this method isn’t as accurate as using their online calculator.

Step 3: Claim dependents — This is where you’ll claim the number of your dependents. The form provides a formula you can use to determine your tax credit for children age 17 and under, and other dependents.

Step 4 (optional): Other Adjustments — Here, you may enter any income you expect to earn for the year that doesn’t come from employment, things like interest or retirement income. Then you’ll enter any deductions you plan to take other than the standard deduction. Claiming more deductions will reduce the amount your employer withholds from your paychecks. Such deductions include charitable contributions, home mortgage interest, state and local taxes, student loan interest, and tax-deductible contributions to an individual retirement account (IRA). Finally, you’ll enter any additional amount you want withheld from your paycheck each pay period.

Step 5: Sign here — This step requires your signature and the date. By signing the form, you’re declaring that under penalty of perjury, everything on the form is accurate.

What is the difference between a W-4 form and a W-2 form? A W-4 and a W-9?

It’s not uncommon for people to confuse the W-4 form with the W-2 form. Think of it this way: the W-4 form is the one you fill out before you start getting paid; the W-2 form is the one you get after you’ve gotten paid.

A W-2 form (aka a Wage and Tax Statement) is a tax form that is a summary of how much money you earned and how much you paid in taxes in a given year. Anyone with an employer should receive a W-2 form. The form includes information like your personal information, your total earnings for the year, how much you paid in income taxes, and how much you paid in Social Security and Medicare taxes.

As an employee, you don’t have to fill out this form. Your employer fills it out and gives it to you after the calendar year (they have until January 31 to send you the form for the previous year’s income. Once you receive the form, you can use it to file your annual taxes. The IRS also gets a copy of this form, so you’ll want to report W-2 income when you file your taxes.

The W-9 form is similar to the W-4 form in that it provides essential information to those paying you — Such as their name, address, and their Social Security Number or Employer Identification Number (EIN). The difference is that the W-9 form is how employers collect information from the independent contractors they hire.

For freelance and contract workers, employers don’t withhold money for taxes. Instead, contractors are responsible for tracking and paying their own income taxes at the end of each fiscal quarter. The IRS expects independent contractors to pay taxes as they earn income just like everyone else; they just don’t have an employer doing this part for them.

At the start of the tax filing season, businesses send 1099 forms to the contractors they worked with that year. They also send a copy to the IRS. The 1099 form, like the W-2 form, summarizes how much money the company paid to the contractor throughout the tax year.

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