FILLING OUT A W-4

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The W-4’s goal is to determine two things:

 

1.  ARE YOU EXEMPT FORM WITHHOLDING?​​

  

Exempt means a very specific thing and, generally, the only way you can claim exemption from withholding is if two things are true:

• You received a refund of all your federal income tax withheld last year

AND

• You expect the same thing to happen this year

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Being exempt means your employer will not withhold any federal income tax from your pay. Exempt does not affect the Social Security and Medicare taxes that will still come out of your check.

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2.  ​HOW MUCH DO YOU WANT THE IRS TO TAKE OUT OF YOUR CHECK?​

 

Generally, the more withholding allowances you claim — and we’ll define these in a moment — the less income tax will be withheld from your paycheck. The exact amount depends on your wages and your W-4. Three things go into the mix:

1. Whether you’re single or married

2. How many withholding allowances you claim

3. Whether you want any extra money withheld

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Here are some examples of things that get you an allowance — that is, they decrease the amount of tax withheld from your paycheck:

• Having a spouse
• Having kids
• Filing as head of household on your tax return
• Planning to take the Child and Dependent Care Credit

 

HOW TO MAKE SURE YOUR W-4 DOESN'T STING YOU IN APRIL

 

It is easy to just throw a couple of numbers onto your W-4 and be done with it, but rushing might come back to bite you later. Here are a few things to remember:

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• Take a conservative approach when you claim allowances - It's easier to get a larger refund than to owe.

• File a new W-4 at work when life changes - A W-4 is not a "set-it and forget-it" type of thing. If any of these events happens to you during the year, update your W-4 so your withholdings reflect your new tax situation:

  • You get married or divorced​

  • You have a child

  • You buy a house

  • You take a pay cut or receive a big raise

  • You work only part of the year

  • You have a lot of dividend income

  • You or your spouse freelance on the side

• Be willing to fiddle with your withholdings - Once you have figured out the sweet spot for your tax situation then you can adjust your w-4 based on your tax goals. If you want a big refund then reduce your allowances by a one or two. If you don’t want the government to have your money then increase your allowances by one or two. Compare from paystub to paystub to determine the net effect before you get to the end of the year.

 

You’ll receive a W-4 when you start a job, but you can change your W-4 any time. Just download it from the IRS website, fill it out and give it to your payroll team. The IRS requires employers to put your new W-4 into effect by the start of the first payroll period ending 30 or more days after you turn it in.

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