What You Need to Know About the W-4 and Tax Withholding

April 10, 2023

Did you ever wonder how the federal government determines the amount of taxes you owe on your annual income? The W-4 Form is the answer. In the following article, we provide an overview of the W-4 and how it is used for tax withholding. We also take a look at recent changes that have been made to the W-4 Form, who needs to fill out or update the W-4, and how to do so. Read on to learn more.  

What is the W-4 Form?

Form W-4, the Employee’s Withholding Certificate, is a document used by the IRS to calculate how much federal income tax an employer should withhold from an employee’s earnings. When you begin a new job, your employer will ask you to fill out a W-4 Form so the correct amount of money can be withheld from your wages and paid out to the federal government. Since the federal income tax operates as a pay-as-you-go tax, you can expect the amount calculated from your W-4 Form to be deducted from your paychecks throughout the calendar year. 

Providing accurate information on your W-4 Form is very important. If too much money is withheld from your paychecks, then you will be issued a refund from the federal government when you file the year’s tax return. Some people like getting a tax refund, but others want to keep as much of their earnings in each paycheck as possible. If too little money is withheld from your paychecks, then you could owe the IRS a hefty sum when tax time rolls around. The goal is to strike the right balance between withholding too much and withholding too little money from your earnings, and an accurate W-4 Form will help you accomplish just that. 

What Changes Have Been Made to the W-4 Form?

In 2020, the IRS made some important changes to the W-4. The new W-4 Form has five sections to fill out instead of the previous seven sections. The revised W-4 Form has eliminated the option to claim personal allowances as a result of changes made by the Tax Cuts and Job Act (TCJA), which doubled the standard deduction and discontinued personal and dependent exemptions. 

Now, the W-4 instructs the employee to list the number of dependents in his or her household and provides the option to record income from a second job, as well as deductions he or she plans to itemize on the tax return. As an employee, you can use the form to indicate whether the circumstances of your earnings may warrant more or less withholding. 

Who Needs to Fill Out or Update the W-4 Form?

So, who exactly needs to fill out the W-4? The answer is everyone who falls under the category of “employee.” If you filled out the W-4 for your employer when you first began a new job, there are special circumstances in which you will need to update the information you first provided on your W-4. Specifically, the IRS recommends checking withholding and updating the W-4 Form early in the year, if the tax law changes, and when life changes occur:

  • Lifestyle – Marriage, divorce, birth or adoption of a child, home purchase, retirement, filing chapter 11 bankruptcy
  • Wage income – If you or your spouse starts or stops working or starts or stops a second job
  • Taxable income not subject to withholding – Interest, dividends, capital gains, self-employment and gig economy income and IRA (including certain Roth IRA) distributions 
  • Itemized deductions or tax credits – Medical expenses, taxes, interest expense, gift to charity, dependent care expenses, education credit, Child Tax Credit, Earned Income Tax Credit

You can use the IRS Tax Withholding Estimator to calculate your estimated federal income tax withholding, see how your refund, take-home pay, or tax due are affected by withholding amount, and choose an estimated withholding amount that works for you. The results are as accurate as the information you provide. In order to use the IRS Tax Withholding Estimator, you simply need to have the following documents handy:

  • Paystubs for all jobs (spouse too) 
  • Other income information (side jobs, self-employment, investments, etc.) 
  • Most recent tax return 

The IRS Tax Withholding Estimator can help you determine whether you need to give your employer a new W-4 Form. 

You can check out this tax withholding summary from the IRS for additional information.  

How to Fill Out the W-4 Form

As mentioned previously, the new W-4 Form contains five sections which the employee must complete. Here’s what goes in each section:

Step 1: Enter Personal Information

Enter your name, address, and social security number, and choose how you will file your tax return:

  • Single or Married Filing Separately
  • Married filing jointly or Qualifying surviving spouse
  • Head of household (Check only if you’re unmarried and pay more than half the costs of keeping up a home for yourself and a qualifying individual.)

Step 1 is used to determine your standard deduction and the tax rates your employer should use to calculate your tax withholding.

Steps 2 through 4 should only be completed if they apply to you. 

Step 2: Multiple Jobs or Spouse Works 

Complete this step if you (1) hold more than one job at a time, or (2) are married filing jointly and your spouse also works. The correct amount of withholding depends on income earned from all of these jobs. 

Step 3: Claim Dependent and Other Credits 

If you have children, this section will help you calculate the amount of the Child Tax Credit and credit for other dependents you may be able to claim on your tax return. 

Step 4 (optional): Other Adjustments

Include any of the following in this section:

  • Other income (not from jobs) – including interest, dividends, and retirement income
  • Deductions – other than the standard deduction
  • Extra withholding – any additional tax you want withheld each pay period 

Step 5: Sign Here

Sign and date to complete the W-4 Form.

We hope this overview of the W-4 and tax withholding proves helpful to you in the new year. The Honest Buck Accounting team works with Early Childhood Education business owners to help them conquer taxes, streamline financials, clean up their books, optimize growth, and build a strong financial foundation for their business for years to come. Contact us today to speak with one of our accounting experts.

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