With new tax rates and new withholding tables in play for 2018, taxpayers may need to take a second look at form W-4, Employee’s Withholding Allowance Certificate (downloads as a PDF).
Form W-4 is used to help your employer determine how much federal tax to withhold from your paycheck. That’s why you’ll complete it and give it to your employer – not the Internal Revenue Service (IRS).
You typically fill out a form W-4 when you start a new job. Some employers will also ask you to complete a new form W-4 at the beginning of each year. You may also, on your own, want to fill out a new form W-4 when your personal or financial situation changes. Examples might include getting married, having children, landing a promotion tied to a raise or picking up a second job. In 2018, you may also want to use the form W-4 to make adjustments under the new tax law.
The updated form W-4 looks like this:
If you are exempt from federal withholding, you don’t have to do much on the form. You only have to fill out lines 1, 2, 3, and 4 (name, address, marital info and Social Security number information), note your exemption at line 7 and sign the form.
Most taxpayers, however, are not exempt. Most taxpayers will put a number on line 5 (indicated above by the orange arrow) that will help your employer calculate how much federal income tax to withhold from your paycheck. That number is the number of allowances you are claiming.
Here’s your rule of thumb:
The more allowances you claim, the less federal income tax your employer will withhold from your paycheck (the bigger your take-home pay).
The fewer allowances you claim, the more federal income tax your employer will withhold from your paycheck (the smaller your take-home pay).
Before you assume that you’d always want the bigger check, consider this: The amount of withholding is credited towards your tax due each year. If you don’t have enough withholding, you’ll owe Uncle Sam at tax time. If you have too much withholding, you’ll be entitled to a refund. The key is to find the right balance.
You figure the number of allowances you’re entitled to claim using the Personal Allowances Worksheet. That worksheet looks like this:
- You are entitled to one allowance for yourself (line A) and one allowance for your spouse (line B).
- You are entitled to one allowance if your filing status is “head of household” (line C).
- If you’re single or married filing separately (MFS) and have only one job; or if you’re married filing jointly, have only one job, and your spouse doesn’t work; or if your wages from a second job or your spouse’s wages (or the total of both) are $1,500 or less, you can claim an additional allowance (line D).
- If you expect to claim the child tax credit (line E) – remember that phaseouts apply based on your income.
- If you claim additional dependents, you may be entitled to more allowances (line F).
- You may also have additional allowances (line G).
The total of those lines (the sum of lines A through G, calculated at line H) gives you the total maximum allowances you can claim. You do not have to claim the maximum if you don’t want to. Remember that the more allowances, the less withholding. If you have circumstances that mean your tax bill might be a little higher than what you pay based on your wages, such as a freelance position that has no withholding or income from another source that isn’t subject to withholding, you may want to adjust your allowances accordingly.
If your situation is a little more complicated, you may need to complete additional worksheets found together with the form W-4 (downloads as a PDF).
For example, if the instructions at the bottom of the Personal Allowance Worksheets (under line H) advise you to complete an additional worksheet, you may need to complete the Two-Earners/Multiple Jobs Worksheet. That worksheet looks like this:
A quick word of warning: If you work more than one job, figure the total number of allowances you are entitled to claim on all jobs just one form W-4. In other words, if you fill out more than one form W-4, don’t claim the maximum on each form you submit to each employer: If you do, your total withholding won’t be accurate. Choose one job for which to report the maximum allowances (in most circumstances, you’ll want to pick the highest paying job). You may still have to fill out a form W-4 at a second or third job – but you’ll probably just want to claim yourself as an allowance on those forms W-4, depending on your circumstances.
If your spouse also works and your incomes are similar, you can also check the “Married, but withhold at higher Single rate” box on your form W-4 instead of using this worksheet. You’ll see it at box 3. If you choose this option, then only one spouse should claim any allowances for credits or fill out the Deductions, Adjustments, and Additional Income Worksheet.
You’ll complete the Deductions, Adjustments, and Additional Income worksheet if you plan to itemize deductions, claim certain adjustments to income, or have a large amount of non-wage income. That doesn’t apply to most taxpayers. That worksheet looks like this:
If you’re just trying to account for tax breaks which reduce your overall income, keep in mind that you don’t have to complete this worksheet or reduce your withholding if you don’t want to.
If you have a significant amount of unearned income (like interest or dividends) or if you have freelance income, consider making estimated tax payments using form 1040-ES, Estimated Tax for Individuals (downloads as a PDF). If that’s too much effort, and you also have a W-2 job, you can make adjustments on your form W-4. Line 6 allows you to authorize an additional amount to withhold from each paycheck. If you expect, for example, to owe an additional $6,000 in tax at the end of the year, you can authorize an extra $500 to be withheld from each monthly paycheck – that’s in addition to your “normal” withholding based on the allowance formula.
When figuring the amount of tax which might be payable, don’t forget about additional taxes like the Net Investment Income Tax (NIIT) (for taxpayers that have investment income above threshold amounts) and the Additional Medicare Tax (for high-income taxpayers).
If you make an adjustment, it’s a good idea to do a quick check-up after a few months so that you don’t have any nasty surprises at tax time. One way to do a quick check is to compare what you expect to owe based on the current year’s tax rates with your withholding. If you need help figuring your withholding allowances, check out the updated IRS withholding calculator. As always, if you have questions, check with your tax professional.