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The Employee’s Withholding Allowance Certificate, also known as IRS Form W-4, is the form your employer uses to determine the amount of federal income tax to withhold from your paycheck. As simple as this 10-line form appears, and as familiar as it might be, the language involved tends to give many people a headache.

Typically, you fill out the W-4 whenever you start a new job. After that, you can alter it at any time during your employment based on your personal preferences, life events, or changing circumstances

Let’s walk through it. The first four lines are fairly self-explanatory:

Line 1 – Name.

Line 2 – Address.

Line 3 – Social security number.

Line 4 – Filing status. This indicates whether you are single, married, or married and filing jointly.

The next three lines are where the more technical concepts kick in:

Line 5 – Number of allowances. This line helps your employer calculate how much federal income tax will be withheld from your paycheck. The more “allowances” you claim, the less money will be withheld from your paycheck for federal taxes, and the larger your paycheck will be. The fewer allowances you claim (as few as zero), the more money will be withheld for taxes, and the smaller your paycheck will be. (See below for more on allowances.)

Line 6 – Additional amount to withhold. Any extra money you want withheld from each paycheck goes here. The most common reason people do this is when they’re making money from any source that isn’t being taxed, like self-employment, interest, or dividends.

Line 7 – Exemption from withholding. Unless you are exempt from paying taxes you will leave this line blank. Most people are not exempt: One condition is an income that does not exceed $1,050, another is having paid nothing in taxes the previous year. (Note that exemption applies only to federal tax withholding, not Social Security or Medicare.) If you are exempt, you only have to fill out lines 1-4, line 7, and your signature.

This video offers a helpful primer.

Considering allowances

If you indicate a smaller number of allowances in line 5, indicating that the government should hold on to a larger portion of your paycheck, you will likely get a significant refund back after filing. Check here for ways to boost your tax refund. Understand, however, that by doing this, you are essentially giving the government an interest-free loan, from the time it’s withheld until the time you get your refund check.

If you enter a higher number of allowances, indicating the government should withhold little (or no) money, it is wise to set up a savings plan early for paying the tax bill. You might want to use this option if you have a large expense pending and don’t want to finance it, or you want to invest the money you’ll owe and make interest on it, but keep in mind that you will still be responsible for the same amount of taxes. In short, choosing to have less money withheld means you will likely have to pay a chunk of money to the government by April 15.

To help you figure out your number of allowances (line 5), the IRS provides a worksheet (page 3 of the W-4) and an online withholding calculator, both updated to reflect the tax code changes that began in 2018.

To use the calculator, taxpayers will need certain information, including an estimate of their 2018 income and other items that affect their taxes (number of children to be claimed, earned income tax credit, etc.). It’s worth noting that the calculator does not ask you to enter any personal information. (For more about the withholding calculator, visit this online FAQ.)

It’s worth noting that the 2018 Form W-4 is newly-designed to implement changes made by the 2017 Tax Cuts and Jobs Act, which increased the standard deduction and the child tax credit, removed personal exemptions, limited or discontinued certain deductions, and revised both tax rates and brackets, among many other changes.

Due to those changes, the IRS suggests that certain taxpayers may need to file a new Form W-4 with their employers: Those taxpayers include two-income families, individuals with two or more jobs or who work only part of the year, those with children who will claim credits such as the child tax credit, and those who itemized deductions in 2017. The IRS says that it anticipates making further withholding changes in 2019.

Adapted from this piece by the Internal Revenue Service.


On filling out your W-4
Intro to the W-4 (video) (Khan Academy)
A beginner’s guide to filling out your W-4 (Lifehacker)
How to owe nothing on your federal tax return (Investopedia)
Withholding calculator (Internal Revenue Service)
Withholding calculator FAQ (Internal Revenue Service)
Your complete guide to the 2018 Tax Changes (The Motley Fool)

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