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What is Form W-4? Here is Your Simple Guide.

What is Form W-4? Here is Your Simple Guide.

IRS Form W-4 informs your employer how much income tax to withhold from your pay. You will need to complete one when you start a new job. You can also send a new W-4 to the human resources or payroll department after a life event that affects your taxes, such as a marriage, divorce, or birth of a child, or if you have paid too much or too little taxes. The form was a bit complicated, but the IRS has simplified it for 2020 and beyond. There are only five steps involved, three of which you can skip if you are the sole breadwinner, have only one job, and have no dependents. The two required steps are to provide your name, address, social security number, marital status, and signature.

A financial expert can help you optimize your financial plan to reduce your tax liability.

What is Form W-4?

The official title of Form W-4 is the Employee Withholding Certificate. When you complete your W-4 correctly, it tells your employer how much to withhold from your pay for federal income tax. Therefore, you must complete a new copy of the form each time you start a new job. As mentioned above, you must file a new W-4 if you are having a child, getting married or divorced, starting a side business, or paying too little or too much tax. The IRS recommends filing a new W-4 every calendar year to ensure you're paying the correct amount of taxes. But if your income and taxes stay the same, you probably won't need it.

What's on the W-4 form?

The W-4 form comes in the form of a four-page package. However, the form is only one page long and has five steps. In step 1, you will be asked to provide the following:

  • Name and address

  • Personal identification number

  • Filing Status: Single, Married or Married, Separate Filing

Steps 2-4 are optional and only apply to taxpayers who have a working spouse or multiple jobs (Step 2), who are claiming dependents (Step 3), or who have adjustments, deductions or special deductions from income (step 4). Step 5 is to sign the form.

Employers then enter the employee's name, address, Employer Identification Number (EIN), and date of first hire. The other three pages of the W-4 package include instructions, a tax chart, and a two-person/multitasking worksheet.

What is federal withholding?

Each time you get paid, your employer withholds (deducts) a certain amount of money from your salary. This money is earmarked for federal income tax and other federal taxes, such as FICA taxes. Because the United States has a pay-as-you-go tax system, you pay income tax throughout the year instead of a lump sum during tax season. Therefore, all employers must withhold federal tax money from their employees and remit it to the IRS. When deciding how much to withhold, your employer will consider your salary and information on your W-4.

The self-employed, independent contractors, small business owners, and others without an employer pay estimated quarterly taxes. You may need to increase your withholding if you have other income, such as bonuses, commissions, or stakes. It should also be remembered that retirees who receive a monthly pension or a cash check must also withhold the money from each payment.

What are the other adjustments on the W-4?

Your salary will count when your employer levies taxes because it determines your tax bracket. But, you can change the exact amount your employer withholds by itemizing other income and deductions.

Additionally, you can ask the employer to withhold a certain additional amount. This withholding applies to income taxes and helps you properly size your taxes, so you don't pay less throughout the year. Ideally, you don't owe a large sum of money or receive a large refund when you file your April tax return (note that the deadline for filing 2022 tax returns in 2023 is April 15).

For example, suppose you are estimating your federal income tax return, and you owe $1,000 at tax time; if you get paid twice a month (24 pay periods), you might want to keep an extra $40 on each paycheck. This will get you closer to paying what you owe on your annual tax return, so you aren't penalized for underpaying.

What happens if an employee does not file a W-4?

Employers need current W-4 forms to withhold the correct amount of federal income tax for employees. If an employee does not complete a W-4, Internal Revenue requires the employer to withhold taxes at the highest withholding rate possible.

Bottom Line

Form W-4 tells your employer how much to deduct from your wages for federal income tax. You must complete a W-4 each time you start a new job. You should also update the form when major changes affect your taxes, such as when you get married or have a child. The simplified form only has five steps, and many taxpayers do not need to worry about steps 2 through 4.