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Every time someone gets a new job, one of the many forms that are required to be filled is a form W4, thus making it effective from the day when a new employee joins an organization. It asks for the information such as name, address, Social Security Number, marital status, etc. Sure enough there can be changes as the life progresses, so it needs to be updated as and when they happen.
Form W-4 conveys how much tax your employer should withhold from each paycheck and how much do you get to get off to IRS. Let’s take a closer look at what the form is used for, how to fill it and why is it so significant.
Formally known as ‘Employee’s Withholding Certificate’, it is an IRS form that employees fill to inform their employers how much tax should be withheld from each of their paychecks. Employers use this form to calculate some payroll taxes and remit the taxes to the IRS on behalf of employees.
The W-4 form is not required to be filled every year. However, you need to fill out a new W-4 form if you change your job or wish to alter your withholdings at your current employment.
In 2017, the Tax Cuts and Jobs Act (TCJA) brought major changes to numerous tax rules. One of them was the removal of personal exemptions. Due to this, the IRS changed the W-4 form too. Earlier, an employee could claim allowances on his/ her W-4 to reduce the amount of federal income tax withheld from his/her paycheck.
Under the modified W-4, an employee who wishes to lower his/her tax withholding must claim dependents or make use of a deductions worksheet. The new form only asks basic personal information and not the number of allowances.
TheW-4 form is available on the IRS website. You can download and follow the steps given below to fill it out correctly.
Step 1: Personal information
Fill in your name, residential address, social security number and tax-filing status.
Step 2: Account for more than one job
If you’re unmarried and have multiple jobs, or you’re married and file jointly with your spouse who also works, then:
a. Usually, a W-4 is needed for each job.
b. For the W-4 of your highest paying job, fill out steps 2 to 4(b) of the W-4. Leave those vacant on the W-4 forms for the other jobs.
Step 3: Claim dependents, including children
If your total income is under $200,000 (or $400,000 if filing jointly), you can enter how many kids and dependents you have and multiply them by the credit amount.
Step 4: Define your withholdings
If you think you will need to claim extra deductions or want extra tax withheld, do make a note of them.
Step 5: Sign and date your W-4
Handover the completed form to your employer’s HR or payroll department.
You may want more taxes taken from your paycheck in order to be eligible for a tax refund in your annual filing. In that case, you should make the following changes to your W-4 form:
a. Decrease the number of dependents.
b. Mention the extra amount to be withheld on line 4 (c)
You may want less taxes taken from your paycheck, perhaps leading to having to pay a tax bill when you file your annual return, you should make the following changes to your W-4 form:
a. Increase the number of dependents.
b. Reduce the number on line 4(a) or 4(c).
c. Raise the number on line 4(b).
If you aim to owe nothing when you file your annual return, then your W-4 should be impeccable. You need to adjust your paycheck withholdings accordingly.
Do make sure that:
For instance, if you file as head of the household and haven’t updated your W-4 for a few years, then you may want to consider filling out the 2021 W-4.
Your tax situation will change if you had a baby or your child turned 18. You need to update your W-4 accordingly.
Non-job income sources: capital gains, interest on investments, rental properties and freelancing. These may be taxable and you would typically need to mention these on line 4(a) of your W-4.
I you plan to itemize (possibly because itemizing will shrink your taxes more than the standard deduction will), it’s advisable that you estimate those extra deductions and alter the amount on line 4(b).
As you are probably aware, getting extra dollars withheld from each paycheck is beneficial in some instances. Put that amount on line 4 (c).
1. If you are exempt from withholding taxes Social Security and Medicare taxes will still be deducted
2. You are exempt only if:
a. You got a refund of all your federal income tax withheld last year because you had no tax liability, and
b. You expect the same this year.
Write ‘exempt’ in the space below 4(c). You need to submit a W-4 form each year to claim your exemption.
Update your W-4 form when you have any of the following life changes:
You can submit a new W-4 anytime. You can and should see how much money gets deducted from your paycheck and then make an estimation for the entire year. Then submit a new, modified W-4 form.
The W-4 isn’t much a complicated thing. However, if in certain circumstances if this is your second job, or you didn’t disclose about your previous employer, spouse’s employment or other similar credits that you are taking on your tax return. Then you would need to make sure that you’re withholding the correct amount and it is not going to capture if you haven’t filled out your form correctly.
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The author, Nick Branson is a CPA and Co- president of myCPE – Continuing Education Platform for Professionals. He has experience of more than 2 decades in the field educating the top professionals in the field of CPA, CMA, CIA and many more.