It’s one of the most basic tax forms a worker will ever have to fill out. The Employee Withholding Allowance Certificate, known as the W-4, tells the IRS how much money should be withheld from each employee’s paycheck. Every time payroll is processed, a piece of their earnings are sent to the government as tax.
The data put down on a W-4 can, in a sense, really impact an employee’s finances for the year–though it won’t impact how much tax they end up paying come to Tax Day. When filing taxes, that’s where the numbers get matched up and the IRS decides if one owes or gets back the money. However, you still want to get this all right on the W-4, because you could, for example, end up owing far more than you thought you did.
The W-4 Vs. The W-2
Before we take a look at the W-4, let’s quickly differentiate it from another very popular workplace form: the W-2. Whereas an employee fills out a W-4, an employer fills out a W-2. Every year around tax season, an employer needs to submit to the IRS W-2’s for their qualifying workers specifying how much money they made and how much was withheld for taxes, Social Security, and the like. The employee will then have a copy of their W-2 sent to them by their employer, for use in preparing their own taxes.
The “Easy” Part Of The W-4
Let’s get back to the W-4. The employee will be first asked to put in their name, address, Social Security #, and marital status. That’s the easy part. Right?
Let’s go back to “marital status.” An employee is considered “single” if she or he is a) legally separated (either through a decree of divorce or separate maintenance) or b) they or their spouse have been a non-resident alien on any preceding day on the calendar year.
If one is a widow, that doesn’t necessarily automatically qualify them as “single” on the W-4. If they have not remarried in the year their spouse died, they may be able to file jointly with the deceased partner as a “Qualifying Widower.” Such a tax classification may decrease their tax burden for the year.
You’ll also notice that on the W-4 there are two checkboxes for “married” status: Married, and Married But Withhold At Single Higher Rate. An employee would choose the latter category if they would wish to have more income tax withheld from their check. Now, why would they want to do that? Because it might better reflect the actual amount of taxes they, as possibly a spouse from a two-income family, might have to pay. It’s a case of paying a little more per pay-period in withholding (a little pain) or getting a huge bill come tax time (a BIG pain).
Withholding Allowances 101
Now we get to the nitty-gritty, the really fun stuff: The Personal Allowances Worksheet. Bundled in with your W-4, you’ll be filling that out before going any further on the form itself.
How many allowances an employee can claim is one of the most important questions on an employee’s W-4, determining how much withholding taxes will be taken out of their paycheck. The larger the number of allowances, the fewer taxes are withheld. If an employee puts down too low a number of allowances, this can result in a large refund. But if they put down too high a number, this can result in a larger-than-expected bill from the IRS (which is what we don’t want).
One way an employee can reduce their withholding is to file as head of the household. To qualify, the person must pay for more than 1/2 of household expenses, be unmarried for the tax year, and have a qualifying child or dependent. They should also have ticked “single” on the marital status question.
Who Is A Dependent?
When filling out your Personal Allowances Worksheet, you will be asked if you have any dependents. The more dependents you can claim, the less money will be withheld from your paycheck; the amount can also qualify you for various tax credits. The IRS defines dependents in a very specific way, and it usually breaks down into two categories: either a qualifying child or relative. The taxpayer themselves and their spouse cannot be claimed.
Here are some very basic qualifications a person needs to fulfill in order to be classified as a dependent on your W-4:
- They need to be a U.S. citizen, resident or national. Residents of Canada or Mexico also qualify.
- They can only be claimed on one person’s tax form as a dependent.
- They cannot be married and have filed a joint tax return.
Then there are more granular rules qualifying children and relatives. The child must be related to you, under 19, living with you at least half the year, supported by you, and not claimed on anyone else’s tax form. The relative must either live with you year-round or qualify as being on the “relatives who do not live with you” list per IRS Publication 501; make less than $4,050 (this number was for 2017; it might or might not change for 2018) and you provide more than half of their financial support; and, of course, no one else is claiming them as a dependent.
Allowances Vs. Exemptions
As in the case of the similar-sounding W-4/W-2, the terms “allowances” and “exemptions” might get confusing. To briefly summarize the differences between the two: allowances are what you are asked to claim on the W-4. Exemptions are what you are asked to claim on your annual income tax form. You would generally claim exemptions for you, your spouse, and your dependents. Important point: your W-4 allowances do not have to be the same as your number of exemptions: they are not based on the same factors.
How Many Allowances Can You Claim?
Here’s the moment we’ve all been waiting for: claiming your allowances! Everything we’ve been discussing thus far will come into play here. You can claim anywhere from zero to…well, as many as 10 or more (though the IRS will be double-checking all this and will inform your employer if your number claimed is too high).
Here are examples of situations in which you might be able to claim a certain # of allowances:
Zero: The maximum amount of taxes withheld, with a likely refund. Use this if someone else can claim you as a dependent on their income tax.
One: Consider claiming this if you are single and have only one job. You will also most likely claim a refund.
Two: Here’s another option for single employees who only have one job. Those with two jobs can claim one allowance on each job’s W-4…or both allowances for one job, and none on the other.
People can also claim two allowances on a joint return when they are married, with one spouse claiming for each of them. It’s important to note that a person can’t claim an allowance that their spouse claims as well.
Three or More: If you are married and have one child, you can claim three allowances. If you have two children, you can claim four allowances and so on.
Taking a glance at the entire W-4 form including worksheets, you’ll notice that there’s a lot more to consider: you have the Deductions, Adjustments, and Additional Income Worksheet (for if you plan to itemize deductions on your income tax), the Two Earners/Multiple Jobs Worksheet (to use if you are in danger of having too little tax withheld), a child tax credit, and more.
These items are beyond the scope of this particular post, but we encourage you to do more research (the IRS website is a good place to start!) and consult your accountant if you have any questions at all about your W-4. The more thoroughly you fill out this form, the better shape you’ll be tax-wise and financially year-round!
(This article is not meant to be construed as actual accounting advice; consult your accountant if you have any specific concerns.)