Everyone who works fills out a W-4 form. This document ensures that your employer withholds the right amount of taxes from your paycheck. Abby Eisenkraft, EA, CEO of Choice Tax Solutions, explains how to fill out a W-4 to optimize your situation.
What Is a W-4 Form?
The W-4, also known as the “employee’s withholding certificate,” is an oft-misunderstood document, explains tax expert Abby Eisenkraft, EA. Many people think they need to be strictly accurate in following the W-4 form instructions.
Reality: The W-4 simply tells your employer how much tax you want withheld from your pay. It is not you pledging to the government that you will file jointly…claim two dependents…and so on. Example: You may be married, but you can use the W-4 to essentially say, “Tax me as if I were single.” Goal: Get your IRS tax withholding just right so that you’re not slapped with a big tax bill or massively overpaying. Best: Err on the side of a refund, but make it a small one.
Key change in recent years: The W-4 used to ask you to select “allowances” in the form of a 0, 1 or 2, which you would use to dial withholdings up or down. As of 2020, you’re instead asked for your filing status—single, married filing jointly, married filing separately, head of household and qualifying surviving spouse—and then invited to make dollar-amount adjustments, says Eisenkraft. New this year: The Deduction Worksheet—step 4(b) has been expanded to reflect four deductions added by the One Big Beautiful Bill Act…tips deduction, overtime deduction, deduction for interest on car loans and the senior bonus deduction. If you are eligible for one or more of these deductions, the amount of withholding can be reduced.
Before You Start: What You’ll Need
Gather your prior year’s tax returns, your W-2, pay stubs and information about other income. If you owed last year or got an outsized refund, figure out why. Did you have capital gains that needed to be taxed? Were you also self-employed and failed to make estimated taxes? With the W-4, you can correct such prior missteps regarding tax credits and deductions.
How to Fill Out a W-4
Completing the form consists of five steps…
- Enter personal information. Make sure everything is accurate and up to date.
- Account for multiple jobs or a working spouse. Remember—you don’t have to report these if you don’t want them taken into account. But additional income would increase the tax owed.
- Claim dependents and credits. Report these if you’re trying to lower your withholding, so less is taken out of your pay.
- Make other adjustments (optional). This section is crucial for adjusting tax withholding for things like capital gains. Example: If you’ll owe 15% on a $70,000 windfall, it’s easier to have your employer take out an additional $10,500 over the course of the year than to pay a big bill at tax time. If you get this windfall midyear, you might want to calculate the remaining pay periods and request additional withholding.
- Sign and submit your W-4 These days, many employers have online portals so you don’t even need to walk down to the payroll department.
How often should I update my W-4?
Any time you take a new job, you’ll be asked to complete the form. But Eisenkraft suggests that you revisit it at least annually as well as any time you’ve undergone life changes such as marriage, birth of a child, divorce or relocating to a different state.
Our tax system is complex, and hitting the withholding “sweet spot” can be a challenge, says Eisenkraft, so even if you prepare your own tax returns, consider hiring a professional to fine-tune your W-4.
