Calculating Withholding Allowances using Form W-4
Every pay period your net income is reduced when your employer takes federally and state mandated taxes out of your paycheck. Form W-4 allows you a degree of control over how much of your income you want to subject to those federal taxes by controlling the amount of withholding allowances you can claim on your paycheck. Withholding allowances adjust the amount of income that is subject to federal income tax. You can adjust your withholding allowances at any time during your employment.
As a new employee you will be asked to fill out a Form W-4. Employees also can submit a new Form W-4 at any time during their employment in order to change their withholding allowances.
- Download Form W-4 from the IRS Web site. This form is in a PDF format, and you can type your information directly onto your document, on your computer, before you print it out. It’s a good practice to keep an updated copy of the Form W-4 on your computer for future use. (In order to save the document, don't type in the information immediately when the PDF loads on your Web browser. Instead, after the PDF loads, use the save button to save a copy of the file to your hard drive. Then, open the downloaded file and then type in any information. This way, you can save the filled-in form on your hard drive.)
- Look over the two pages of the Form W-4, and familiarize yourself with the format of the paperwork. On the first page, there are brief instructions, followed by a Personal Allowances Worksheet, followed by the actual Form W-4 that is given to the employer. On the second page, there are two additional worksheets: the Deductions and Adjustments Worksheet followed by the Two-Earners/Multiple Jobs Worksheet. Finally, there are two tables, which are related to the Two-Earners/Multiple Jobs Worksheet.
- Now, we are ready to begin figuring out how many withholding allowances to claim. We're going to do this first, before filling out the rest of the form so that in case you need to discard the form, there won't be any of your personally identifiable information on the page (such as name, address and Social Security number).
- Start with the Personal Allowances Worksheet. Work through lines A through H. Be aware, that the questions being asked on these worksheets relate to the current tax year. Also be aware that married couples who anticipate filing jointly should calculate their withholding allowances jointly, and then divide those allowances between themselves. "If both you and your spouse are employed and expect to file a joint return, figure your withholding allowances using your combined income, adjustments, deductions, exemptions, and credits. Use only one set of worksheets. You can divide your total allowances any way, but you cannot claim an allowance that your spouse also claims" (from Publication 505).
- If you anticipate taking the standard deduction and personal exemptions only and no other deductions (such as adjustments to income or itemized deductions), then skip ahead to number seven.
- If you anticipate having a significant amount of income other than wages, and/or adjustments to income, and/or anticipate itemizing your deductions in lieu of the standard deduction, then continue on to the Deductions and Adjustments Worksheet. Work through lines 1 through 10 of that worksheet. You may need to utilize worksheets found in Publication 505, Tax Withholding and Estimated Tax, to complete some calculations. You may also need to refer to your tax return for the previous year to help you estimate non-wage income, adjustments to income, or itemized deductions.
- If you do not have more than one job, skip this step to number eight. Do you have two or more jobs as an employee? Continue on to the Two-Earners/Multiple Jobs Worksheet. This worksheet is used for unmarried persons with more than one job and for married couples who plan to file jointly and together they have two or more jobs. Work through lines 1 through 9 of this worksheet. You may need to refer to the tables below it also.
- You now have a number that represents your withholding allowances. If you want, you can cross-check this number to see if this is the right amount of withholding allowances for you. In order to cross-check your newly calculated withholding allowances against your expected tax liability, we need to start with the exact amount of money that will be withheld every pay period using the withholding allowances you just calculated. In order to calculate your withholding per pay period you will need to use an online payroll calculator (see links below). In order to fill out the payroll calculator you will need to have either a current paystub or paperwork that outlines the fields of data you need in order to properly make your calculations. Using the payroll calculator, figure out how much federal income tax will be withheld using the withholding allowances you just calculated. Then, multiply that number by the remaining pay periods in the year and add in how much federal tax has been withheld year-to-date. The result is your expected federal tax withholding for the year. This number we compare to your expected tax liability for the full year. The expected tax liability can be calculated by using worksheets in Publication 505 or by using the tax planning feature of your tax software. Comparing your withholding for the year to your tax liability for the year, you can figure out if your withholding will be more than your tax liability (resulting in an expected refund) or less than your tax liability (resulting in an expected balance due). From here we can adjust your withholding up or down to bring your expected refund or expected balance due within a range that is acceptable to you.
- Now having cross-checked your withholding allowances, fill out all the rest of the Form W-4.
- Give the Form W-4 to your employer. If you are starting a new job, your employer will use this information to calculate your tax withholding on your first paycheck. If you are submitting a revised Form W-4, "your employer can put it into effect as soon as possible. The deadline for putting it into effect is the start of the first payroll period ending 30 or more days after you turn it in" (from Publication 505).
- Review your paycheck after your withholding allowances go into effect. What we are looking for is whether the level of withholding will be sufficient for you to be able to live comfortably and pay your tax liability in full by the end of the year.
- If you are a non-resident alien, there is a special procedure when filling out Form W-4. Refer to the Special Instructions for Form W-4 For Nonresident Alien Employees on the IRS Web site.