This article was originally published on July 16, 2015. It was updated on July 19, 2016.
The W4 form is short and might seem like it should be easy to fill out, yet it still confuses many people. A particularly confounding issue is how many allowances to claim on the W4. Let's take a look at the W4 form, at what allowances are, and at some smart strategies you might employ.
What's a W4?
The W4 form (links to a PDF file) is one that your employer will require you to fill out so that it will know how much money to withhold from your paychecks for taxes. That's because most of us don't just pay our taxes in April, but throughout the year, either when employers withhold and submit tax dollars on our behalf to the IRS or when self-employed folks pay quarterly estimated taxes. It might seem like a pain, but having most of your tax obligation automatically withheld before it ever reaches your hand is probably less painful than having to cough up many thousands of dollars on demand in April.
Thus, the W4 form is necessary. It takes up two pages, but the part your employer requires is only the bottom third of the front page. The top of the page is a personal-allowances worksheet, and the back of the page is a deductions-and-adjustments worksheet.
The part of the form that you must fill out and submit asks for:
- Your name and address.
- Your Social Security number.
- Whether you're single or married (and, if married, if you'd like your withholding done at the higher rate for single folks).
- The total number of allowances you're claiming on the W4.
- Any additional amount you'd like withheld from each pay period.
- Whether you're exempt, having had no tax liability last year and having received a refund of taxes withheld, and expecting the same this year.
- Your signature.
That should all seem pretty straightforward, except for the allowances.
Allowances on a W4
Each allowance you claim will reduce the amount withheld from your paychecks. The allowance worksheet will help you arrive at the right number. You claim one allowance for yourself if you're being claimed as a dependent on anyone else's tax return. You then add more allowances as you go down a list of conditions. For example, if you're single with only one job, or married with a non-working spouse, you add another allowance. If you file your tax return as a Head of Household, you add another. You'll end up with a number that you can record on the form (on Line 5) as the number of allowances you're claiming.
It's not always quite that simple, though. If you plan to itemize or claim adjustments to income, you might want to reduce your withholding. You can use the worksheet on the back to help you figure out how many allowances to claim. If you're single and work two or more jobs or are married with both spouses working, and your total earnings from all jobs exceeds $50,000 if you're single or $20,000 if you're married, you'll want to flip the W4 form over and complete the "Two-Earners/Multiple Jobs Worksheet," lest you end up having too little tax withheld.
If you find the form and its worksheets intimidating, the IRS makes the calculations simpler with its Withholding Calculator -- give it a whirl. If you use tax-prep software, it might also offer a withholding-determining calculator.
When the W4 form is especially important
The W4 form needs particular attention at certain times in your life. Obviously, every time you start a new job, you should file one with your employer. Less obviously, though, you should also file one when your financial life changes in a significant way, such as when you get married or divorced, gain or lose a dependent, lose a job, retire, buy or sell a home, realize significant capital gains from the sale of investments, inherit a lot of money, declare bankruptcy, cash in stock options, or have dependent-care costs that change a lot. You can choose to update the form at any time -- a particular triggering event is not required. Note that if you don't file a W4 form with your employer, then your employer is required to withhold taxes at the highest rate -- as if you're a single person with no allowances claimed.
The most logical approach to determining how many allowances to claim is to get as close as possible to having your total tax due for the year automatically withheld. Having too much withheld and then getting a hefty refund is exciting, but it really means you lent money to Uncle Sam interest-free during the year. Having too little withheld will mean you'll have to come up with whatever is due, which isn't always easy. In addition, if you underpay your taxes too much, you may have to pay a penalty charge and possibly interest, too. What's too much? Generally, you don't want to owe more than $1,000 beyond your withheld amount -- or to have paid less than 90% of the total tax due for the current year or less than 100% of your prior-year tax, whichever is the smaller amount.
The W4 form and the allowances you claim on it can make a big difference in your financial life.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.