Here’s the first bit of information you need to know about the federal form W-4, Employee’s Withholding Allowance Certificate: it only applies to employees. If you’re self-employed, you can move along, there’s nothing to see here for you (though you may want to check out other IRS info as outlined on Publication 4591, Small Business Federal Tax Responsibilities).
Here’s the second bit of information you need to know about the federal form W-4: it’s not for the use of the IRS. A form W-4 is designed specifically to assist employers to calculate the correct federal income tax that can be withheld from an employee’s pay.
You’re probably most used to a form W-4 in the context of new employment. But a form W-4 can also be useful in the context of life changes, including getting married, having kids and taking another job. The total number of withholding allowances you claim affects your withholding; the lower the number of allowances, the more tax will be withheld. As you increase the number of allowances, that number comes down. If you claim more than 9 allowances, your employer may be required to send your W-4 to the IRS for review. Don’t be alarmed. People with incomes over $100,000 and with substantial itemized deductions may need to claim over nine allowances.
It’s important to get the number as pretty close to accurate as possible: if you withheld too little come tax time, you’ll owe and if you withheld too much come tax time, you’ll be entitled to a refund – but remember, it was your money all along so what’s the point of that, exactly?
For most taxpayers, the number of withholding allowances on a form W-4 will be the same as the number of personal exemptions claimed on a form 1040. However, it can get tricky if you have more than one job, if your spouse works or if you itemize your deductions. If that’s the case, you’ll want to use the worksheet on the back of the form W-4. You can also use the online IRS Withholding Calculator to figure out the most accurate withholding.
If you claim more than 9 allowances, your employer may have some initial difficulty figuring your withholding since many payroll packages can’t process that many allowances (the IRS tables only go up to 9). But don’t panic, if you’re entitled to claim more than 9 allowances, you can still do so. Your employer may just have to make some adjustments.
If you’re exempt from withholding, you’ll want to be sure and note it clearly on your form W-4.
The key to the form W-4 is not to be scared of it. It’s easy to change and you should revisit it at least every year or when you have some big life changes. If you’re ever confused about whether you’re claiming the right amount, ask your tax pro to take a peek at your form W-4 together with your return. I think you’ll be glad you did come April 15 (or, as this year, April 18).
