The federal Form W-4, Employee's Withholding Allowance Certificate, must be completed so that you know how much federal income tax to withhold from your new employee's wages. The importance of having each employee file a Form W-4 cannot be overstated, so make its completion a priority.
If for some reason an employee does not file one, you must withhold tax as if the employee had claimed no exemptions. If a married employee does not claim his married status on Form W-4, the employer must withhold on the basis of the "single employee" withholding tables. Since the withholding rates for single employees are higher than those for married workers and since the amount of tax withheld from a given wage payment decreases as the number of exemptions claimed increases, it is important that you ask all employees to file a certificate.
Form W-4 also has another important function: In many states, a copy must be sent to a state agency as part of the required information about new hires.
The file is in Adobe Portable Document Format (.pdf), and you will need the free Acrobat Reader to view and print the file.
Get Your Tax Withholding Just Right (Form W-4)
How to Tell If Your Withholding Is Wrong—And What to Do About It
The IRS doesn’t want to wait until the end of the year to collect taxes from you. It wants its percentage of your income each time you get paid. So you dutifully complete Form W-4 for your employer, providing the company with information so it can calculate how much in the way of Social Security, Medicare and income taxes it should withhold and send to the IRS per pay period on your behalf. The goal is: get your W-4 just right so you pay exactly what you’ll owe at the end of the year, but this can be a tricky process.
You Know You Got It Wrong If…
How much of a refund did you get last year? Did you owe the IRS money instead? These are both clues that you didn’t get your withholding right when you completed your W-4, particularly if your refund or your deficit was significant.
If you received a nice, walloping tax refund, you gave the IRS way more money than you had to. Unless you qualified for a refundable tax credit or two and that represents part of your refund, this is just your own money being returned to you interest-free after the close of the tax year. It didn’t grow for you as it would have if you had given the IRS just enough over the course of the year and placed the excess in a money market fund instead, or even into a savings account paying minimal interest.
If you complete your tax return only to realize that you owe the IRS money, this is even worse. Not only will you have to come up with that money long after you earned it, but the IRS may impose an underpayment penalty on top of it.
The penalty kicks in if you paid in less than 90 percent of what you owe or less than what you paid last year, whichever is less. You’ll dodge the penalty bullet if the total of what you owe is less than $1,000 after calculating in what you paid through withholding and any refundable credits you’re entitled to.
You don’t risk either of these scenarios when you get your Form W-4 right. This starts with understanding the various tax withholdings and how your employer uses the information on your W-4 to arrive at them.
Income Tax Withholding
Several factors influence the amount of income tax withheld from your pay, including your filing status and how many dependents you have. Your employer will apply the information you’ve entered on your W-4 to the Income Tax Withholding Table published by the IRS to determine what percentage of your pay must go to income taxes.
Your employer will withhold more if you’re single with no dependents than if you’re married, or if you’re single but you do have one or more dependents. This happens because you and your dependents each represent an “allowance” on your W-4. The more allowances you have, the less tax you pay.
But you don’t have to claim allowances if you don’t want to. For example, you might do a little work on the side apart from your regular job for which you’ll receive a 1099-MISC form at the end of the year. Taxes aren't withheld from this income. Going with the rule that the IRS prefers to be paid when you get paid, you can either send in estimated tax payments over the course of the year to cover this income, or you can claim zero allowances on your W-4 form so more money than necessary comes out of your paychecks and goes to the IRS.
But if you’re not receiving other income that you want to cover the taxes on, doing this only results in using the IRS as a savings account.
How to Determine Your Allowances
Normally, you would enter two allowances on your W-4 if you’re single with no dependents and have only one source of income: one for yourself and one because you’re single and working just one job. But things get much more complicated if you work multiple jobs, if you’re married, or if you’re single but have dependents—this could change things considerably because you might qualify for head of household filing status. Another wrinkle can come up if you only work a portion of the year.
Fear not—the IRS stands by ready to help out. When your employer gives you a W-4 to fill out, the form should include a worksheet that you can use to calculate the correct number of allowances you should claim.
Easier yet, the IRS also offers an interactive withholding calculator online. The interactive calculator will automatically make adjustments if it appears that you may be eligible for any tax credits that will affect your end-of-year tax liability. It also accommodates more than one income if you’re married and planning to file a joint return.
FICA Tax Withholding
Your employer will also withhold what are collectively known as FICA taxes. FICA stands for the Federal Insurance Contributions Act and it covers Social Security and Medicare taxes, both of which are essentially insurance funds for the benefit of the disabled and elderly. They’re obligatory. You don’t have the option of not paying them.
The Social Security tax amounts to 6.2 percent of your gross income as of 2017. Medicare is 1.45 percent, although you may be subject to the Additional Medicare Tax if your income exceeds certain limits: $200,000 if you're single or file as head of household, $250,000 if you're married filing jointly, and $125,000 if you're married but file a separate return.
These percentages are withheld from your paychecks and your employer must contribute equal amounts. Because these are fixed rates, you don’t have wiggle room to adjust the amounts. It’s possible, however, to pay too much in Social Security tax, so this withholding is something you’ll want to keep an eye on as the year progresses if you earn over a certain amount.
Be Alert With Social Security Withholdings
The Social Security tax is subject to a wage base limit. This means that when your earnings hit a certain threshold, you no longer have to pay Social Security tax—for that tax year anyway. Withholding will begin again in January.
The threshold was $118,500 in the 2016 tax year, but it unfortunately goes up to $127,200 in 2017. When and if you hit these earnings levels, touch base with your employer to make sure the company realizes that you no longer have to contribute to Social Security until the next tax year.
That’s It. You’re Done. Or Are You?
Completing your Form W-4 isn’t a one-time event. Life isn’t stagnant and some obvious changes can make the form out-of-date in a flash, resulting in withholdings that are too much or too little. Head back to the IRS interactive calculator if you:
- Get married
- Get divorced
- Have a child
- Change jobs
- Get a raise
- Buy a home
- Make investments
- Take on extra work
Ask your employer for a new W-4 and complete it to reflect the new information if any of these things happen. You can complete a new W-4 anytime you like and give it to your employer. It doesn’t have to be filed with the IRS. Any changes should show up in your take-home pay pretty much immediately.
You can also adjust your W-4 at any time simply because you got it wrong last year and ended up with a big refund or owing money. You don’t have to wait for a new tax year to roll around. Make adjustments as soon as possible.
An Easy, Temporary Fix
If you complete your tax return and realize you owe money, and if nothing in your life has changed that would require completing a new W-4, you can divide how much you ended up owing by the number of pay periods remaining in the year. Let’s say you owed $3,000 and you’re paid weekly and there are 36 weeks left in the tax year. Based on your current W-4, you’ll be running at about an $83 deficit each paycheck during that time period. If you ask your employer to withhold an additional $83 from each of your paychecks going forward through the remainder of the year, you shouldn’t owe money again come next April.
You can take the same precaution if you suddenly come into extra money. Ask your employer to withhold a little extra to accommodate that additional income.
This option should only be used as a Band-Aid, however. It’s a quick fix, a temporary remedy until you get your W-4 completed correctly, and you’ll want to do this as soon as possible.