Key Takeaways
- Complete Form W-4 at the start of employment so your employer can accurately calculate how much federal income tax to withhold from each of your paychecks.
- If you withhold too much, it’s like giving the federal government an interest-free loan. If you withhold too little, you may face an unexpected tax bill and perhaps a penalty for underpayment.
- Your personal information is used to determine your filing status, Standard Deduction, and tax rates. If you hold more than one job or are Married Filing Jointly and your spouse also works, include that information on your Form W-4.
- You can claim an exemption from withholding if you had no income tax liability in the prior year and don't expect to have a tax liability in the current year.
What is Form W-4?
In most cases, if you earn money, the IRS expects you to pay taxes on it. Some types of income are specifically excluded from taxation, but when you work as an employee and earn above certain amounts, you'll almost certainly need to pay taxes on your earnings to the federal government.
To make sure you withhold the right amount of taxes, you will need to submit some paperwork when you start a new job — specifically, a W-4 Form. This document is used to report the necessary information related to your tax situation, and employers use this to calculate how much federal income tax to withhold from each of your paychecks.
What does a W-4 form do?
The W-4 form is used to provide information to your employer so that they can determine how much to withhold from your paychecks. This will ensure that the IRS collect federal income tax from you in a timely manner. Not paying enough during the year can result in a tax bill and perhaps a penalty, while withholding too much can create a refund when you file your tax return.
A refund sounds nice, but getting one usually means that you could have had more take home pay in each paycheck. Once you've filled out your W-4, your employer will then withhold money from your paycheck and send it to the IRS. These payments will count toward your annual income tax bill that you will calculate when you prepare your return the following year.
What is the difference between a W-4 and a W-2?
There are several key differences between a W-4 and a W-2, specifically, who completes it and what it’s used for.
A W-4 form is completed by you and provided to your employer at the start of employment, so they know how much to withhold from your paychecks.
On the other hand, a W-2 is given to you by your employer when it’s time to do your taxes. A W-2 form will show your wages and the taxes withheld for the year.
What changed with the new W-4 form?
In the past, the W-4 was based on a system of withholding allowances. You typically filed a new form when you started a job or needed to adjust your tax withholding. The IRS replaced the method for determining the amount to withhold beginning in 2020 to reduce the complexity of calculating how much to withhold from each paycheck. It also changed the W-4 Form to increase the understanding and accuracy of the withholding system.
While the withholding form uses the same underlying information as the old design, it replaces the complicated worksheets from the old form with more straightforward questions. These changes should make it easier for employees to more accurately determine how much should be withheld from their paychecks.
TurboTax Tip:
You can use your W-4 to account for self-employment taxes in addition to your income from your primary job. Add your self-employment income on Step 4(a) of the worksheet and input your self-employment tax per pay period for Step 4(c).
How do you fill out Form W-4?
The Form W-4 has a five-step process for determining your withholding:
1. You provide personal information and your anticipated filing status in this step. This will be used to determine your Standard Deduction and the tax rates your employer should use to compute your paycheck withholding.
2. Complete this step if you (1) hold more than one job at a time, or (2) are married, filing jointly and your spouse also works. The correct amount of withholding will depend on the income earned from all of these jobs between both you and your spouse.
3. If you have children, this section will provide instructions for determining the amount of the child tax credit and the credit for other dependents that you may be able to claim when you file your tax return.
4. Include any of the following items:
- other estimated income from sources such as interest, dividends, or retirement
- deductions you plan to take other than the Standard Deduction to reduce your withholding
- any supplemental withholding you want for each paycheck
5. Sign your name and date the form to complete your W-4.
To calculate the most accurate withholding for Steps 2-4, you can use TurboTax's W-4 Withholding Calculator.
Will I owe taxes if I claim 0 on my W-4?
When allowances were part of the W-4 form, the maximum amount of taxes would be withheld from your paychecks when you claim 0. With the new system, you’ll indicate whether you need to withhold more or less than the standard amount. If you have 0 dependents and adjustments, the standard amount will be withheld from your paychecks.
This means that while you’ll receive less money on your paychecks, you should have a lower tax bill at the end of the year. However, you might still owe taxes if, for example, you are self-employed and don’t account for those taxes by withholding more on your W-4.
Can you claim exemption from tax withholding on your W-4?
Yes, you can also use the W-4 to declare yourself exempt from withholding, which means that your employer would not withhold any of your income to your federal income tax. You can claim an exemption from withholding if you had no income tax liability in the prior year and don't expect to have a tax liability in the current year.
For example, if you are a single taxpayer who earns approximately $8,000 each year, then you would not likely owe federal income tax. This is because of the Standard Deduction you can claim on your tax return, would likely eliminate the possibility of owing tax on your $8,000 of earnings.
Can you use the W-4 form for self-employment income?
You can use your W-4 to account for the taxes you’ll owe on your self-employment income in addition to your income from your primary job.
To account for self-employment taxes through your withholdings from your wages, you can add your self-employment income on Step 4(a) of the worksheet. Then for Step 4(c), you’ll need to input self-employment tax per pay period.
The W-4 doesn’t compute self-employment tax for you, so you’ll need to complete those calculations separately.
While some taxpayers might choose to use a W-4 to partially account for self-employment taxes, the most accurate method is to use 1040-ES for quarterly estimated taxes.
If you expect to owe more than $1,000, you’ll usually need to pay estimated quarterly taxes.
Estimated taxes are divided into four payments throughout the year.
Note that if you’re going to factor self-employment taxes into your W-4 withholdings, keep in mind that you might still owe. This is especially likely if you don’t earn the same amount of self-employment income each pay period and need to use estimates for how much tax you might owe.
When should you update your W-4?
When too much money is withheld from your paychecks, it means you've given the federal government an interest-free loan (as well as earning yourself a tax refund). If you do the opposite and withhold too little, this could mean an unexpected tax bill and perhaps a penalty when you file your return or even a penalty for underpayment. Either way, there's a better way to manage your money.
Instead of facing this uncertainty each year, you should update your W-4 when you experience a major personal life change or have a change in income.
- If you want to pay only what you owe, this will go a long way toward avoiding this outcome.
- If you look forward to a big tax refund every year, you should also pay attention to your withholding, because how much you have withheld directly impacts your refund.
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