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The Beginner’s Guide to Form W-4 and Tax Withholdings

The Beginners Guide to Form W-4 - TaxAct Blog

When you start a new job as an employee, your new employer typically asks you to complete Form W-4Employee Withholding Allowance Certificate.

This document is a two-page form from the Internal Revenue Service (IRS). It tells your employer how much money to take out of your paycheck to cover income taxes.

The IRS recommends submitting a new Form W-4 each year as well as anytime your personal or financial situations change. This ensures the right amount of tax is withheld during the year.

For instance, if you get a promotion, get married or have a baby, you may want to adjust your W-4 to match the changes. Leaving it the same could result in too much money withheld each pay period – or worse, too little withheld resulting in a large tax bill later.

Here are a few other things you should know about Form W-4.

The worksheets

The bulk of a W-4 includes three different worksheets that ask information about your taxable income.

  1. The Personal Allowances Worksheet: This portion of the form indicates how many deductions – or “personal allowances” – you want to claim. The more allowances claimed, the less money withheld from your paycheck. (Quick tip: Use the Paycheck Plus calculator to help you determine the right number of allowances for your tax situation.)
  2. The Deductions and Adjustments Worksheet:  The second portion of the form is for people who plan to itemize deductions on their tax return. If that’s you, be sure to pay attention to this section. This is where you provide an estimation of the amount of deductions you plan to claim. But, don’t fret – this number doesn’t have to be exact. You can always claim more or less on your tax return. It simply gives the IRS a better idea of your tax liability.
  3. Two-Earners/Multiple Jobs Worksheet: This section is for people with two jobs or married people who both work. It calculates how much money you should withhold from your paycheck based on that second income.

Line 6

The beauty of Form W-4 is that your employer handles withdrawing and paying your taxes for you based on your allowances.

But, if you have any unearned income (i.e. interest or dividends) or receive payment from freelance work, there’s a good chance taxes are not automatically withdrawn from those payments. In that case, you’re responsible for ensuring the taxes due on that amount gets paid to the IRS.

One way to cover that cost is to make estimated tax payments throughout the year. However, if that seems like too much work, you do have another option.

On Form W-4, you can authorize your employer to withhold additional money from each paycheck to cover the taxes on that extra income. Simply mark the dollar amount you’d like withheld on line 6.

Keep in mind, that’s in addition to your “normal” withholding based on the number of allowances you claimed. Choosing to withhold more throughout the year can help you avoid a large tax bill when you file your return.

Your W-4 is not your W-2

Form W-4 and Form W-2 may sound similar, but they serve separate functions when it comes to an employee’s tax situation.

As stated previously, Form W-4 is completed when you first start a new job. Form W-2, Wage and Tax Statement, is given to you by your employer at the end of each year prior to filing your tax return.

On the form, you’ll find a variety of important information. That includes total wages earned, federal and state (if applicable) taxes withheld, and contributions to Social Security and Medicare for the time you worked for that employer during the calendar year.

Employers are required to send a W-2 to each employee by January 31 of each year. They must also submit a copy to the Social Security Administration. The information listed on the form is used to complete your tax return and must be submitted to the IRS. It is not used to pay or withhold tax.