Updated for tax year 2019.
After filing 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 in your tax outcome next year.
If you have too much withheld, you may receive a huge tax refund. However, that likely means you’re not making the best use of your paycheck.
If you have too little withheld, you could face a big tax bill when you file. Additional penalties and interest could tack onto that total as well if you didn’t pay enough of your tax liability throughout the year.
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 file a new one.
To help you navigate the process, below are the answers to frequently asked questions about Form W-4.
Why do I have to complete a Form W-4?
The quick answer is: The IRS requires it.
The longer answer is: Form W-4 tells your employer how much Federal income tax to withhold from your pay.
The W-4 requires basic personal information, like your name, address, and social security number. The number of allowances (we’ll talk more about that later) and your filing status will determine how much income tax is withheld from your pay.
You can submit a new W-4 whenever you like. And when you have life changes (i.e. have a child or get married) or your financial situation changes (i.e. you get a pay raise), you should update it. You can use the TaxAct withholding calculator located within each product to see how changes to your W-4 will impact your take-home pay.
Why does my employer withhold so much from my paycheck?
Your employer has no discretion over how much tax is withheld from your pay.
Every employer is required to withhold the amount that corresponds with the IRS withholding tables. The table is broken down based on your pay, the pay period (i.e. weekly, bi-weekly, semi-monthly), and the information on the Form W-4 you completed.
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 allowances you should claim varies. It 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.
Generally, the more children you have, the more allowances you should claim.
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.
*Note: the dependency exemption was eliminated with the Tax Cuts and Jobs Act of 2017. You can no longer claim a personal exemption for your dependents on your return.
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?
Using a withholding calculator is the quickest and easiest way to determine how a change in allowances will affect your take-home pay.
But before you make adjustments, 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 submit a new 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 non-working spouse.
If your spouse has a significant income, you may need to check the “Married but withhold at higher Single rate” 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 to fill out the form.
As mentioned previously, TaxAct can do the calculations for you. You simply answer a few questions, and the program automatically populates the form.
If you decide to use the worksheets, however, this is what you need to know:
- 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 step 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 withhold and how to complete the form. However, there’s nothing safe about letting the IRS hold your money for a year or more completely interest-free. The small investment of time to make sure your income tax withholding is correct is well worth it.
At the same time, some 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 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 withheld.
How do I file a new Form W-4?
Your payroll department can supply a form if you ask. You can get the form directly from the IRS’ website too. Additionally, if you use TaxAct to calculate your withholding allowances, you can print the Form W-4 when you are done.
Once the form is completed, don’t send it to the IRS. Give it to your payroll or human resources department.
Why shouldn’t I have more tax withheld and receive a big refund at the end of the year?
To make the best use of your money, 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’ bank account. 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 can use that extra money to pay down your credit card instead.
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?