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Simplify your taxes: Tax savings with Form W-4

Simplify your taxes: Tax savings with Form W-4

This article is for informational purposes only and does not constitute legal or tax advice.

Always consult with a tax professional for your specific circumstances.

What is Form W-4?

The W-4 Form “Employee’s Withholding Certificate” is a tax form employers use as a base document to determine how much tax to withhold when they prepare your paycheck.

You are usually required to fill it out when you land a new job or your personal or financial circumstances change.

You may qualify for an exemption if you had no tax liability for the previous tax year or you are not expecting to have one in the current year. Use the W-4 to inform your employer not to deduct any federal income tax from your wages.

NOTE! An exemption claimed on Form W-4 is only valid for one calendar year.

How does the W-4 Form work?

The purpose of this form is to help the employer determine how much federal income tax should be withheld from the employee's paycheck.

This form is required by the IRS, and failing to complete it accurately can result in penalties or additional taxes owed at the end of the year.

The W-4 form asks the employee to provide some basic information about their personal and financial situation, including:

  • their name,
  • Social Security number,
  • filing status,
  • number of allowances, and
  • any additional withholding that they want to request.

The number of allowances claimed on the form determines how much of the employee's income will be subject to federal income tax withholding.

Generally, the more allowances claimed, the less tax will be withheld from each paycheck. However, claiming too many allowances can result in owing taxes at the end of the year.

In addition to federal income tax, the W-4 form may also be used to determine how much state income tax should be withheld from the employee's paycheck.

However, the rules for state income tax withholding vary by state, so employees should consult a tax professional for guidance on how to complete the form.

NOTE! If an employee fails to provide all the necessary info on the W-4 form, it can result in too much or too little tax being withheld from their paycheck.

  • If too much tax is being withheld, the employee may receive a large refund at tax time but may have less money in their paycheck throughout the year.
  • If too little tax is being withheld, the employee may owe additional taxes at tax time and may be subject to penalties for underpayment of taxes.

What changed with the W-4 in 2023?

The IRS redesigned the W-4 in 2023, formerly known as Employee Withholding Allowance Certificate which replaced the previous complex worksheets with simpler ones to ensure a better understanding and the accuracy of the withholding system.

The older version of the W-4 had a personal allowance worksheet. When someone claimed 0 in allowance in the older version of W-4 their withholding increased. This meant they would likely get a refund so ideally there should be no tax obligation.

Deciding whether to claim 0 or 1 allowance was based on your specific circumstances such as your marital status, number of jobs, children, and more. These allowances were tied to personal and dependent exemptions.

NOTE! Allowances no longer exist in the redesigned Form W-4.

Why you might need to update your W-4?

You will go through many changes during your life.

The following scenarios have the potential to result in the need to update your W-4 Form:

  • You are single this year but you meet the love of your life and decide to get married next year.
  • You planned to expand your family and are expecting your first child soon.
  • Your employer may have to close the business due to financial distress.
  • You find a better opportunity so you may end up working for a new employer.
  • You may initiate a side hustle and you expect to owe taxes on your earnings and you decide to have it withheld on your W-4.

Pro tip. Even when life seems to go on smoothly for a couple of years it is still a good idea to periodically review your W-4 to see if it needs an update.

How to fill out a W-4?

Form W-4 preview

Step 1: Identification information

Provide your personal information and indicate your filing status.

Step 2: Specification on multiple jobs or spouse works

This step is only applicable to you if:

  • You have been working at more than one job;
  • You are married, filing jointly and your spouse has a job too.

You can opt for one of the three following options in step 2.

Option (a)

In this option, you will use the IRS tax withholding estimator. It will ask you to provide relevant information and will compute your expected tax withholding, anticipated tax obligation, and refunds if any.

If your pay rises, you will have to re-estimate your withholding and furnish a new form. The accuracy of the estimate will depend on the accuracy of the information you enter.

NOTE! You’ll see that this section says “Reserved for future use”. This indicates that this section is not yet updated by the IRS.

Option (b)

If together you and your partner have more than three jobs you need to fill out the second part of the multiple jobs worksheet to get a roughly accurate estimate.

To fill the worksheet you need to use a lookup table on page 4 which has three tables, one for each filing status. It might look scary at first sight but you’d be fine once you know how to use it.

Let’s say you are married and filing jointly. You and your spouse each work one job which is two jobs in total. You earn $75,000 and your spouse earns $55,000.

Go to the relevant table you will find the left-hand column listing the higher earnings, and the top row listing the lower earnings, look at the intersection of $70,000-$79,999 and $50,000-59,999 and there is the number you need to enter. In this case, it is $5,750.

Option (c)

You may opt for option 2-(c) If you and your spouse work in total 2 jobs. This option is comparatively easy from the rest of the two options. Fill out a separate form for each job and check the box.

Step 3: Claiming dependent and other credits

If your earning is $200,000 or less as a single person or $400,000 as a married filing jointly you may be eligible to claim the child tax credit and credit for other dependents. Claiming dependents on W4 will lower your withholding taxes.

1. Child Tax Credit. Use this formula to determine how much you can claim for your kids under 17:

  • Child tax credit = Number of children * $2,000

NOTE! You have to meet certain conditions to be eligible for the child tax credit.

2. Credit For Other Dependents. Use this formula to determine how much credit you can claim for your other dependents:

  • Credit for other dependents = Number of dependents * $500

3. Any Other Credit. You are allowed to add any other credits that you qualify for in this step such as education tax credit, foreign tax credit, etc.

Pro tip. When adding these credits your paycheck will increase and your refund will decrease.

Step 4: Other adjustments

Here you will make adjustments to the following:

Non-job income 4-(a)

You can enter here your earnings from other sources not subject to withholding such as income from dividends or retirement.

Deductions 4-(b)

If you choose nothing you will get the standard deduction by default. Your withholding is lowered with the IRS-prescribed amount. It varies according to your filing status, $13,850 for single filers and $27,700 for married and filing jointly.

However, if you opt for the itemized deduction you will have to complete the deduction worksheet

Extra withholding 4-(c)

Enter any additional tax you want your employer to withhold from your paycheck.

NOTE! The more tax your employer withholds the less money you get in your paycheck.

Step 5: Sign here

The final step is to sign off your W-4 to make it valid.

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How withholding impacts your cash flow

The more withholding tax means you get less in your paycheck.

If extra tax has been withheld you do get a refund when you compute your taxes with the actual number. However, your cash flow will be affected while you try to manage your household expenses.

Less withholding tax means you get more in your paycheck and will have more cash on your hand for day-to-day expenses. However, you might end up getting a huge tax bill when you file your tax return.

Pro tip. Make sure your estimates are close to accurate because if you are expected to owe the tax authority more than $1,000 you are required to pay estimated tax on a quarterly basis and failure to do so will result in a tax penalty.

Therefore, it is crucial that you fill out your W-4 Form in a way that is accurate to the extent that you only pay what you owe. Neither less nor more.

Should you include your self-employment income?

If you are self-employed and decide to pay taxes on it using W-4 then you should provide your self-employment earnings in Step 4-(a).

Next, calculate your taxes and determine your withholding tax using this formula:

  • Taxes to be withheld for self-employment income = Self-employment income tax / Pay periods

Enter the resulting amount in step 4-(c). You can also add your Social and Medicare taxes to be withheld.

Pro tip. You can claim half of the self-employment tax as a deduction. This will reduce your withholding taxes.

Getting the specific outcome of tax saving by having an accurate estimate requires tax planning which means considering the impact of each piece of information you provide in the W-4.

NOTE! There are multiple technicalities to pay close attention to. Consider turning to a tax pro to help you:

  • legitimately determine a reasonable amount of withholding,
  • ensure you receive sufficient funds in your paycheck, while also
  • prevent you from being burdened with a huge tax bill at the end of the year.

They will also review your previous tax return to see whether or not your expected taxes exceed $1000. If it does, they would advise you to pay the estimated taxes to make sure the IRS does not impose a penalty on you.

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1. Is there a new W-4 form for 2024?

Yes, there is an updated version of Form W-4 for 2024. The 2024 W-4 includes revisions particularly in Step 2, focusing on withholding calculations for those with multiple jobs or complex tax situations.

2. Do I need to fill out a W-4 form every year?

Filling out a W-4 form annually is not mandatory unless you're claiming an exemption or if there are significant changes in your personal or financial circumstances.

3. What's the difference between a W-2 and a W-4?

A W-4 is a tax withholding certificate completed by employees, while a W-2 is a Wage and Tax Statement detailing annual wages and taxes withheld. Employees fill out W-4 forms, whereas employers file W-2 forms with the IRS and provide copies to employees.

4. When should I review my W-4?

It's advisable to review your W-4 whenever there are changes in your personal or financial situation. Additionally, conducting an annual review, even without significant changes, is a good practice.

5. Can I use the W-4 form for self-employment income?

The W-4 form is primarily for employed individuals. For self-employment income, you can estimate expected taxes, multiply by 12, and enter this amount in step 4(c) of the W-4, indicating additional tax withholding.

6. Should I claim 0 or 1 on my W-4?

Deciding to claim 0 or 1 on the older version of the W-4 depends on individual circumstances. Consulting a tax specialist is recommended to determine the best option for your situation.

7. Will I owe taxes if I claim 0 on my W-4?

Claiming 0 on the older version of the W-4 typically results in increased withholding, often leading to a refund. However, your final tax liability depends on all income-generating activities during the tax year, which will be determined when filing your tax return.

Ines Zemelman, EA
Founder of TFX