If you’re just starting out in the workforce, the Form W4 your employer hands you may look confusing and foreign. If you’ve been in the workforce for a while but just changed jobs, the form may still look completely different from what you’re used to. This is because fairly recent changes in the tax law made it necessary to revamp this common IRS form. Whatever your situation, we’re happy to help you understand and complete this form so you can get it back to your new employer promptly.

What You Should Know About Tax Withholding

Before you learn how to adjust your tax withholding, you should probably know what it is. If you’re new to the workforce you may not know much about it, so we’ll give you a little background.

The federal income tax overseen by the Internal Revenue Service is a pay-as-you-go tax. This means that they expect you to literally pay the tax as you go, making payments throughout the year as you earn money. You can’t just work all year and then pay your taxes at the end. Instead, you pay a little bit of tax with each paycheck you earn. You may not know you’ve paid this tax because your employer does the work for you.

Each time your boss writes you a paycheck, she figures out how much tax you owe on that money. She then deducts it from your paycheck and gives that amount of money to the IRS instead of to you. This helps prevent you from falling behind on your taxes or receiving a massive tax bill at the end of the year.

What is a Federal W4 Withholding Allowance Certificate?

w4 form

Your boss will, of course, know how much money you make working for him. But he may not know how much money you make from your rental property or stock trades — and this money is taxable just like your paycheck. A Withholding Allowance Certificate serves as your chance to adjust your withholding to account for these other sources of income. This form doesn’t get filed with the IRS. Instead, your employer keeps it and uses it as a guide to how much tax to withhold for you based on the allowances you’ve chosen.

So what’s an allowance, exactly? For those of you who have been around for a while, allowances are very similar to what we used to call exemptions. If that doesn’t help you, here’s a more detailed explanation.

If I am a single person with no children, I can claim one allowance for myself. The IRS knows I have to eat and live, so they won’t charge me tax on every penny I earn. Instead, they will give me a certain amount as an allowance or deduction for myself. This allowance reduces the amount of money I have withheld from my paycheck because it reduces my overall tax liability.

Now let’s say I have two kids. It’s going to cost me even more to live and eat because I have to feed and clothe my kids, too. So now I claim three allowances: myself and each of my children. This reduces my tax liability and the amount taken from my paycheck even further. My income tax allowance changes as my life situation changes. A W4 is just a way to explain my situation to my employer so he knows how much money to withhold from my paycheck. Every employee’s situation could be different, so my boss needs a withholding allowance certificate from all of us so he knows what to do.

How Many allowances Should I Claim?

The number of allowances or exemptions you claim on your form or certificate depends on your situation, but it should generally match what you claim on your tax return at the end of the year.

1 Allowance

If you’re single and no one else can claim you as a dependent, you can generally simply mark single on your W4 and count yourself as a single allowance. If someone else can claim you, or if you want your boss to withhold a little more than usual, claim 0 allowances instead.

2 or More Allowances

You’ll have 2 allowances if you have a spouse and file jointly. Each of your children adds another allowance, so a family of four could claim 4 allowances. If you’re claiming your children, you will need to provide that information on Part 3 of your form.

Not Sure How Many Allowances You Qualify For?

If you’re still not sure how many allowances to take, there is a personal allowances worksheet with your W4 that will help you figure it out so you don’t have to try and guess. This worksheet is a big help, but things can get a little more complicated yet.

If you and your spouse both work, or if you have more than one job, fill out part 2 on your W4 form to appropriately adjust your withholding. Optional but helpful on the form is Part 4. This portion of the form allows you to specify if and how much extra money you want your employer to withhold. If you’re not sure, you can add your other income to the appropriate line and let your employer use it to calculate your withholding for you while including this extra income in their calculations.

A Withholding Warning

At this point, savvy taxpayer, you may be formulating a plan. If you have extra money taken out of your check every week, you will likely overpay and get a bigger tax refund at the end of the year. You’re right, of course, but the IRS doesn’t like it when you essentially use them as a savings account. If you get a massive refund too often, the IRS will actually penalize you for it. Remember too that the IRS doesn’t pay interest. It’s wiser to put a little extra money aside in a savings or other interest-bearing account than to give it to the IRS to hold.

We must, of course, also caution you about going the other way. If you claim extra allowances or fail to account for other taxable income, you could end up owing the IRS. You’ll have more money in your pocket throughout the year, but you’ll owe more at the end. The IRS is fine with this within reason, but charges penalties if you pay too little during the year and owe too much at the end. Your best bet is always to try and make your W4 allowances as accurate as possible.

About the Tax Withholding Estimator Tool

Tax Withholding Estimator

Because getting your withholding right can be tricky, the IRS has developed a tool to help you. Their online ax Withholding Estimator Tool will walk you through a series of questions to help you determine how best to complete your withholding statement. The tool is quite thorough and will show you how different withholding choices will impact your tax refund as well as your take-home pay throughout the year.

To use the calculator, you will need to have pay stubs for all of your jobs, information about any other income you receive, and a copy of your most recent tax return. Once you provide some key information, the calculator will do the heavy lifting for you.

Picnic Tax Can Help

If you are confused or would simply prefer getting help from a real person, we encourage you to reach out to us today. Here at Picnic Tax, we pride ourselves on allowing clients to use our services on an a la carte basis. You don’t need to swear your loyalty to us come tax time — we’re happy to provide as much or as little help as you need. We will gladly help you with your W4, even if you plan to file your return on your own at the end of the tax year. Of course, we’ll be there then if you need us, too.