If you’re starting a new job, want to boost your tax refund, or want to avoid making estimated tax payments, get familiar with IRS Form W-4.
The W-4 form is used to determine how much income tax should be withheld from your wages. That’s the basic purpose of the W-4 form. And while simple in principle, it’s important to get your paycheck withholding correct. Otherwise, you may be in for a big surprise when you file your next tax return.
But the W-4 form can be used for other reasons too. If you have a side hustle and don’t want the hassle of quarterly estimated tax payments, you can sign up for extra withholding using the W-4 form. It also works for any dividend or interest income during the year.
To complete the W-4 form, you’ll need to include things like your expected filing status, family income from other jobs, number of dependents, and tax deductions you plan to claim. Your employer may offer an electronic version of the form. Once your employer has the necessary information, the company will take it from there and do the necessary calculations. But to help make sure you get it right, here are 10 tips every employee needs to know about the W-4 form.
Tip 1: You don’t need to submit a W-4 form every year
You aren’t required to file a W-4 form with your employer every year. If you’re happy with your current tax withholding, then do nothing and leave your current Form W-4 in effect with your employer.
However, when you start a new job, you’re required to complete a W-4 form at that time. That’s the only way your new employer will know how much federal income tax to withhold from your wages.
You also must file a new W-4 form if you want to adjust the amount of tax your current employer withholds from your paycheck. Ideally, you want the total amounts of your annual withholding and your tax liability for the year to be close, so that you don’t owe a lot or get back a lot when you file your return. A large refund just means you gave the IRS an interest-free loan.
If you owed more tax than you expected last year, use the IRS’s Tax Withholding Estimator to make sure you’re on track, the earlier in the year, the better. If your tax withholding is off-kilter, go ahead and submit a new W-4 as soon as possible. This is especially important if you have a major change in your life, such as getting married or having a child.
Tip 2: The W-4 form is easy if your taxes are simple
The W-4 form is simple if you only have one job and your taxes are straightforward – you’re not filing a joint return with a spouse who works, you don’t have dependents, you’re not itemizing or claiming deductions other than the standard deduction, you’re not claiming tax credits, and you don’t have additional income from self-employment, rental property, dividends, or interest. If that describes you, all you have to do is provide your name, address, Social Security number and filing status, and then sign and date the form. That’s it — you’re done! Your employer will compute your tax withholding based on the standard deduction and tax rates for your filing status, with no other adjustments.
Tip 3: The W-4 form takes longer if your taxes are complex
If your taxes are more complicated, it will likely take you more time to complete a W-4 form. That’s because you’ll need to have on hand information about your spouse’s income, your dependents, tax credits, and the deductions you expect to claim. Unless you know these numbers off the top of your head, you may need to take the form home to complete it.
Tip 4: Multiple jobs and employed spouses require more information
Having multiple jobs or a spouse who is also employed can affect the amount of tax withheld from your wages. Tax rates increase as income rises, and only one standard deduction can be claimed on each tax return, regardless of the number of jobs. As a result, if you have more than one job at a time or file a joint return with a spouse who is also employed, more money should be withheld from the combined pay for all the jobs. Adjustments to your withholding must be made to avoid owing additional tax and potential penalties when you file your tax return.
Fortunately, the W-4 form has a section where you can provide information about additional jobs or a spouse’s income so that your withholding can be adjusted accordingly. Step 2 of the form actually lists three different options you can choose from to make the necessary adjustments. The IRS recommends completing a W-4 for all your jobs to get your total withholding as close to your expected tax liability as possible.
Tip 5: Take tax credits and deductions into account
The W-4 form makes it easy to adjust your withholding to account for tax credits, such as the child tax credit, education, and foreign tax credits, and deductions. Including credits and deductions on the form will decrease the amount of tax withheld, which increases the amount of your paycheck and reduces any refund you may get when you file your tax return.
For deductions, it’s important to note that you should only enter deductions other than the basic standard deduction on Line 4(b), such as those for student loan interest and IRAs. However, do not include the standard deduction amount itself. If you have multiple jobs or a working spouse, complete Step 3 and Line 4(b) on only one W-4 form. To get the most accurate withholding, it should be the form for the highest paying job.
Tip 6: The IRS has an online tool to help you complete a W-4 form
To get the most accurate withholding, use the IRS’s Tax Withholding Estimator to help you fill out the W-4 form. You’ll also want to use this tool if you expect to work only part of the year, have dividend income or capital gains, are subject to additional taxes such as additional Medicare tax, or have self-employment income.
The IRS tool is also a good option if you have privacy concerns — the IRS doesn’t save or record the information you enter in the tool. If you want to keep other sources of income confidential, the tool will calculate an amount to report as “extra withholding” on Line 4(c). The tool doesn’t ask you to provide sensitive information such as your name, Social Security number, address or bank account numbers, either.
You’ll need to gather some information before you start using the tool. Have your most recent income tax return handy. You’ll also need your most recent pay stub (your spouse’s, too, if you’re married). Collect information for other sources of income as well, such as statements and 1099 forms.
Tip 7: You can set up extra withholding for non-wage income
If you receive taxable income that isn’t from wages — like interest, dividends or distributions from a traditional IRA — you can have your employer withhold tax from your paycheck to cover the extra taxes. Just put the estimated total amount of this income for the year on Line 4(a) of your W-4 form and your employer will calculate the proper withholding amount for each pay period. In most cases, you won’t have to submit estimated tax payments for this income.
Don’t include income from a side gig on Line 4(a).
Tip 8: You can set up extra withholding for a side hustle
If you have a side job as an independent contractor, you can use the W-4 form to have extra taxes withheld from your regular job’s paycheck to cover your side job, instead of making estimated tax payments for your second job. You’ll definitely want to use the IRS’s Tax Withholding Estimator tool for this calculation. You can also pay self-employment taxes through withholding from your regular-job wages. Don’t include self-employment income as “other income” on Line 4(a), though. That line is only for income that isn’t from a job.
Tip 9: You can claim a withholding exemption
You can claim an exemption from withholding on a W-4 form. There isn’t a special line for this on the form, but you can claim it by writing “Exempt” in the space below Line 4(c) if you qualify. You also have to provide your name, address, Social Security number and signature. Looking ahead to next year, you qualify for an exemption in 2023 if (1) you had no federal income tax liability in 2022, and (2) you expect to have no federal income tax liability in 2023. If your total expected income for 2023 is less than the standard deduction amount for your filing status, then you satisfy the second requirement.
Be aware that if you claim an exemption, you’ll have no income tax withheld from your paycheck and you may owe taxes when you file your return. You might be hit with an underpayment penalty, too.
An exemption is also good for only one year — so you have to reclaim it each year. If you were exempt in 2022 and wanted to reclaim your exemption for 2023, you have to submit a new Form W-4 by February 15, 2023.
Tip 10: Extra Withholding Can Increase Your Tax Refund
Although the tax withholding system is designed to produce the most accurate withholding possible, that is, a low tax payment or refund when you file your return, you can tweak your W-4 form to generate a larger refund if that’s what you really want. Simply add an additional amount on Line 4(c) for “extra withholding.” That will increase your income tax withholding, reduce the amount of your paycheck and either jack up your refund or reduce any amount of tax you owe when you file your tax return.
If you have a specific refund amount in mind, use the IRS’s Tax Withholding Estimator to show you how much to put down on Line 4(c). On the results page, you can tell the tool that you’d like to end up with a refund of at least $1,000 or $5,000 or whatever you want. The tool will ask you questions and provide an analysis and instructions on how to adjust your withholding to get to the result you want. You can even download a W-4 form with the appropriate amount preloaded on Line 4(c).