Posted by Carmen Garcia

Understanding Form W-4

Understanding Form W-4

One of the many documents your employer will ask you to complete is IRS Form W-4: Employee Withholding Certificate when you get a new job. The way you complete this Form determines the amount of tax your employer will take from your pay. Your employer sends the withheld money from your paycheck to the Internal Revenue Service (IRS), along with your name and Social Security number.

Withholding tax is the payment of the annual income tax bill calculated when you file your tax return in April. This is why a W-4 form requires identifying information such as name, address, and Social Security number.


What is the W-4 Form used for?

When you begin a new job, your employer will ask you to complete a W-4 form. It is important to complete a W-4 because the IRS requires people to pay income taxes throughout the year gradually. If you don't withhold enough taxes, you may owe the IRS a surprisingly large amount by April, plus interest and penalties for paying fewer taxes during the year.

Also, if you withhold too much tax, your monthly budget will be tighter than necessary. Plus, you'll be giving an interest-free loan to the government when you can save or invest that extra money and earn a return , and you won't receive any excess taxes paid until the following April when you file your return and get a refund from the IRS. 

If you do not submit Form W-4, the IRS will ask the employer to withhold your pay as if you were single, without any further adjustment.


How to complete Form W-4

The IRS renewed Form W-4 for 2020 and ruled out the possibility of claiming personal benefits. Previously, a W-4 came with a personal allowance spreadsheet to help you determine how many allowances to claim. Answering the spreadsheet questions created an overview of your tax situation that allowed the employer to withhold the correct wages.


All you need to do is complete the new W-4 Form if you started a new job in 2020 or if you want to make changes to the amount withheld from your pay.

The more benefits you claim with the W-4 Form, the less your employer will deduct from your salary. The less you claim, the more your employer will withhold.

The revised Form is intended to facilitate the process of determining how much an employer should withhold. If you are divorced, single, or have a spouse who is not working, has no dependents, has only earned income, and does not need tax credits or itemized deductions (except standard deduction), completing a W-4 is straightforward. With the new W-4 Form, all you have to do is provide your name, address, social security number, and marital status for registration purposes and sign and date the Form.

If your tax scenario is complicated, you will need to provide information about your dependents, your spouse's income, other employment income, and the tax credits and deductions you intend to claim.

The IRS recommends using the online withholding tax calculator to ensure the correct amount is withheld from your paycheck. Meanwhile, employers use the IRS 15-T to calculate the amount of federal income tax withheld from employee salaries.

You can use Form W-4 to request additional withholding of money from each salary, which you should do if you owe more taxes than your employer would normally pay.

You can ask the employer to withhold an additional amount if you are earning self-employment income and want to avoid making estimated tax payments on that income. You can likewise use Form W-4 to prevent the employer from withholding money from wages, but only if you are constitutionally exempt from withholding tax because you had no tax liability in the previous year and did not intend to have a tax liability for the current year.


When do you need to file a new W-4 form?

Typically, your employer will not send Form W-4 to the IRS; once you use it to determine your deduction, the company will file it. You can change the withholding tax at any time by sending a new W-4 to your employer.

Situations that require a change in W-4 include marriage or divorce, having a child, or finding a second job. You can also submit a new Form W-4 if you think you have withheld too much or too little from the previous year when preparing your annual tax return and expect your situation to be similar for the current year. Changes to W-4 will take effect over the next one or three pay periods.


Special considerations for Form W-4

If you started a job in the middle of the year and didn't work at the start of the year, here's a tax cut that can save you money. If you do not work more than 245 days per year, ask your employer in writing to use the part of the year method to calculate your withholding tax. The basic withholding tax formula assumes full-year employment, so without using the part-time method, you will end up withholding too much and will have to wait until tax time to request a return.


Summary

  • Employees can change their withholding tax at any time by sending a new W-4 to their employer.

  • Employees complete a W-4 form to inform employers of the amount of tax to withhold on their wages based on marital filing status, dependents, loans, tax deductions paid to the employee advance, etc.

  • If you do not file the Form correctly, you may have to pay a fee at the time of submission.

  • The IRS has renewed the 2020 form to make it easier to complete.


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Carmen Garcia
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