Updated for tax year 2017.
After you file your tax return, a smart financial move is to double check your Form W-4. Ensuring you have the right amount of tax withheld from your paycheck can make a big difference on your tax outcome next year.
If you have too much withheld, as many Americans do, you might receive a huge tax refund but not be making the best use of your paychecks.
If you have too little withheld, you could face a big tax bill and potential penalties and interest when you file the following tax season.
When it comes to your personal finances, it’s important to take the time to learn about tax forms like Form W-4 and determine if you need to make revisions and file a new one.
To help you navigate the process, below are the answers to frequently asked questions about Form W-4.
Why does my employer withhold so much taxable income?
Your employer has no discretion over how much tax is withheld from your pay.
Your employer is required to withhold the amount that corresponds with the IRS withholdings tables. The table is broken down based on your pay, the time period and the information on the Form W-4 you filled out.
What’s a withholding allowance?
A withholding allowance is a number that your employer uses to determine how much federal and state income tax to withhold from your paycheck. The more allowances you claim on your Form W-4, the less income tax will be withheld from each paycheck.
The number of exemptions you should claim varies and is based on a number of factors, such as marital status, job status, earned wages, filing status and child or dependent care expenses.
Is a withholding allowance the same as a dependency exemption?
No, a withholding allowance is not a dependency exemption. However, they are loosely related.
The size of a withholding allowance is based on the annual value of a dependency exemption. For 2017 and 2016, that amount is $4,050.
A mistake some people often make is assuming they can only claim as many allowances as the number of children they have. That is not true. In fact, it may be better to claim more allowances than the number of children you have if you have multiple children. However, many other factors aside from children can affect the optimum number of allowances you should claim, including additional income, deductions or tax credits.
How do allowances affect my paycheck?
The more allowances you claim, the less income tax is withheld from your pay. Fewer or zero allowances mean more income tax is withheld from your pay.
To put it another way:
More allowances equal more take-home pay and money in your pocket.
How much will one additional allowance change my take-home pay?
The best way to determine how one additional allowance will change your take-home pay is to use the Form W-4 Withholding section in TaxAct (located in the Next Year tab) to calculate the difference.
To quickly estimate how much one withholding allowance will change your federal income tax withholding, multiply your tax bracket rate by the amount of one exemption ($4,050 in 2017). Next, divide the result by the number of pay periods in one year.
For example, if you are paid once a week and are in the 25 percent tax bracket, you will add one withholding allowance to your Form W-4.
Here’s how it works:
25 percent X $4,050 (the amount of one exemption) = $1,000 (the annual tax benefit of one exemption at the 25 percent tax bracket)
$988 / 52 weeks = $19.23
That result is around the amount your weekly paycheck should go up with a new Form W-4.
But before moving on, don’t forget your state income tax withholding as that will be affected too. When you receive your first paycheck with the new withholding allowances, take note of how they affect your pay. If you believe it’s not the right amount or if your circumstances change, you can always file another Form W-4.
Why would I want to check the “Married but withhold as Single” box?
You generally have less federal taxes withheld when you check the “Married” box. That’s because the withholding tables assume you are married filing jointly with a nonworking spouse.
If your spouse has a significant income, you may need to check the “Married but withhold as Single” box to have enough taxable income withheld.
Should I use the worksheet that comes with Form W-4?
You can use the worksheet on Form W-4. However, there are much easier and more accurate ways fill out the form.
If you use the Form W-4 Withholding section in the Next Year tab in TaxAct, TaxAct does the calculations for you.
If you do decide to use the worksheets, these are the worksheets you should be aware of:
- The Personal Allowances Worksheet: This worksheet is used for determining the number of deductions (or “personal allowances”) you can claim. The more allowances you claim, the less tax is withheld from your paycheck. For more information on the personal allowances worksheet see our guide here.
- The Deductions and Adjustments Worksheet: If you plan to itemize deductions, the deductions and adjustments worksheet will help you determine what you can deduct. Income adjustments like student loan interest or retirement contributions can also be included. This is meant to be an estimation of your tax liability and can be different than what you actually claim on your tax return.
- Two-Earners/Multiple Jobs Worksheet: This section is for people with multiple jobs or married people who both work. It calculates how much money you should withhold from your paycheck based on the additional income from having multiple jobs or earners.
Is it better to have more earned income withheld, just to play it safe?
Choosing to have too much tax withheld may feel safer and easier than figuring out how much you should have withheld and how to fill out the form to make that happen. However, there’s nothing safe about letting the IRS hold your money for a year or more. The small investment of time to make sure your income tax withholding is correct is well worth it.
Many taxpayers don’t want to risk having a tax bill at the end of the year – no matter how small. If that’s how you feel, adjust accordingly, provide your revised and filled out W-4 form to your employer and plan for a small tax refund.
You can still celebrate when you get your tax refund check, plus you can be happy knowing you didn’t have too much tax over-withheld.
How do I file a new Form W-4?
If you use Paycheck Plus, you can download a new Form W-4 with all of your updated information. Your payroll department should also supply a form if you ask.
Additionally, if you use TaxAct to calculate your withholding allowances, you can print a blank Form W-4 when you are done.
After you update the new form, take it to your payroll department. Do not send it to the IRS.
Why shouldn’t I have more tax withheld and receive a big refund at the end of the year?
In order to make the best use of your money, you should try to pay the right amount of tax throughout the year by having the correct amount withheld. For instance, if you have an emergency, the money will be in your savings account – not in the IRS coffers. Essentially, you’re giving the IRS one big, interest-free loan.
Look at it this way, if you have credit card debt, you may be paying high-interest rates while trying to pay it off. The IRS pays no interest to you for the money you give them by having too much tax withheld.
You wouldn’t overpay your mortgage, electric bill or any other expense by thousands of dollars just so you can get a big refund at the end of the year. Why would you want to do that with your taxes?