Choosing the optimal withholding will ensure you don't have too much or too little deducted from your paycheck. Use the W-4 form to estimate the proper amount to be withheld.
The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.
Step 1—Obtain a copy of IRS Form W-4
Whether you need to fill one out for a new job or make adjustments to your withholding for a current employer, you always need to use a W-4 form. It’s likely your employer will have a copy available for you. If not, you can always search the IRS website to download and print it.
Step 2—Complete the personal allowance worksheet
The amount of your federal withholding is based on your estimated taxable income for the year. When you estimate your taxable income, you must take into account your filing status and the number of exemptions you anticipate claiming. Each of these items is important to determine how much of your income is taxable.
The personal allowance worksheet allows you to calculate “allowances” which in essence reduce your withholding for each of these items. As you fill out the worksheet, you can claim one allowance for you own personal exemption, one for your spouse and one for each dependent you claim on your tax return. And if you usually file as head of household, which is subject to more favorable tax brackets than single taxpayers, you can claim an allowance for this as well.
Overall, the more allowances you report on the W-4, the less money will be withheld from your paychecks.
Step 3—Complete deductions and adjustments worksheet
You can also reduce your withholding for some of the deductions and tax credits you anticipate claiming at the end of the tax year. For example, if you itemize your deductions every year or claim certain adjustments to your income, such as the student loan interest deduction, this worksheet will further reduce your withholding to account for these deductions.
If you are aware of certain tax credits you will be taking advantage of this year, you can factor those amounts into your withholding too. The more accurately you report these items, the closer your annual withholding will be to your actual tax liability.
Step 4—Estimate your withholdings
One of the ways of converting all of your allowances into actual dollars is to use the IRS wage-bracket method. To do this, simply access the IRS wage-bracket tables and use the appropriate one for your filing status and pay period. On the left-hand column, locate the income range that covers your earnings for each paycheck and find where it intersects with the number of allowances you are claiming from the top row. The amount you see at the intersection is the exact amount your employer will withhold from your paycheck. In the unlikely event you claim more than 10 allowances on your W-4 form; then you must use the alternative percentage method to calculate your withholding.
Striking the right balance
Two key amounts are affected by your W-4: your paycheck and your tax refund. How you fill out your W-4 largely depends on what outcome you are trying to achieve.
Claiming more allowances will put more money in your paychecks, so you can spend or invest it as needed throughout the year. But it could also keep you from over-withholding, which means a smaller, or non-existent tax refund. You could even end up owing tax at the end of the year if you claim too many allowances on your W-4.
Claiming fewer allowances will increase your withholding – giving you smaller paychecks, but increasing the chance you’ll get a tax refund. Some people depend on this annual “windfall” as a way of saving money.
Other factors, such as your spouse’s income, can also affect your W-4. For example, when one spouse earns significantly more than the other, the spouse with the higher income will sometimes claim all the allowances on his or her W-4. Other couples will split the allowances between their two paychecks.
The key is to understand the rules, so you can get the outcome you’re looking for.
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