What is a W4 allowances form and why is it important?

The IRS W4 tax form is used by your employer to determine how much federal income tax they should withhold from your paycheck. Once hired, you’ll be asked to fill out a federal W4 and provide info on the total number of allowances or exemptions you are claiming each new payday. Completing your W4 accurately is very important because mistakes affect your refund, or your tax bill.

It’s important to note that you can and should always submit a new IRS W4 form if your personal or financial situation changes. 

How do I fill out my W4?

Filling out a Form W4 is more than a little intimidating sometimes. But don’t lose any sleep! Contact your local Liberty Tax professional and they will be happy to assist you – with your W4 and any other tax issues you may have. If you’d like to handle it yourself, follow the step-by-step instructions below.

Step 1:

Provide your name, address and social security number. In addition, provide your marital status (that is, single, married filing separately, married filing jointly, of head of household) you expect to use when you file your federal tax return. This will determine the tax table/bracket used to figure your amount of withholding.

If you’ve recently gotten married or changed your name and haven’t updated that info with the Social Security Administration, you will need to update that in the “Name Changes” section.

If you are single, or if you are married but only one of you works, and you work at only one job at a time, you may skip Step 2.

Step 2:

If (a) you have more than one job at the same time, or (b) you are married filing jointly and you and your spouse both work, you have some extra things to consider. If you skip this Step 2, you will probably be under-withheld and could owe taxes when you file your return.  

The issue is that Employer #1 would not know that you or your spouse is working for Employer #2, and each employer would assume he/she is the only employer involved. Let’s look at a simplified example. You and your spouse each earn wages of $20,000 in 2020. Assuming you file as married filing jointly, your standard deduction will be $24,800. Each employer will assume each of you will be able to use that $24,800, so since each of you earn less than that standard deduction amount, each employer will withhold zero federal income tax from your wages. In reality, your joint tax return will show a total of $40,000 in wages ($20,000 for each you and your spouse), and after subtracting the $24,800 standard deduction, your taxable income will be $15,200 . . . resulting in a tax due upon the filing of your 2020 return in the amount of $1,520; possibly plus penalties and interest.

In order to avoid such an unwanted, and unhappy surprise, you can either use the Tax Withholding Estimator at www.irs.gov/W4App, or the Multiple Jobs Worksheet on pages 3 and 4 of the Form W-4 instructions. Instructions as to the specific use of these tools are outside the scope of this article, but if you should need assistance in completing these calculations, your Liberty Tax® professional will happy to help.

Step 3:

Multiply the number of qualifying children by $2,000 and enter the total on the W-4 and multiply the number of “other dependents” by $500  

A $2,000 child tax credit (CTC) is available for each “qualifying child” – determined by the following seven (7) factors:

1. 1. Age test - child must have been under the age of 17 at the end of the tax year
   2. Relationship test – child must be your own child, stepchild, adopted child or foster child; you can also claim your brother, sister, stepbrother, stepsister and any of their descendants (e.g., nieces, nephews, grandchildren)
   3. Support test – the child cannot have provided more than half of his/her own financial support during the tax year
   4. Dependent test – you must claim the child as a dependent on your tax return. To be claimed as a dependent (and these are somewhat redundant), he/she must:
      1. Be your child (including adopted and foster), sibling, niece, nephew, or grandchild
      2. Be under age 19, or under age 24 if a full time student for at least 5 months of the year, or be permanently disabled regardless of age
      3. Have lived with you for more than half the year
      4. Have provided no more than half of his/her own support for the year
   5. Citizenship test – child must be a US citizen, a US national, or a US resident alien
   6. Residence test – child must have lived with you for more than half the year (exceptions for children born or died during the year, and for temporary absences such as school, vacation, medical care, military service, incarceration, and divorced or separated parents
   7. Family income test – the child tax credit is phased out if your modified adjusted gross income (MAGI) is above certain thresholds based on your filing status

A $500 other dependent credit (ODC) is available for a “qualifying child” or a “qualifying relative.”

A qualifying child is defined as:

1. 1. Your biological child, stepchild, adopted child or foster child, sibling, half-sibling or step sibling, or an offspring of any of these
   2. They haven’t already been claimed for the CTC or ODC by you or someone else
   3. They are a US citizen, a US national, or a US resident alien
   4. They aren’t filing a joint tax return with their spouse
   5. They are under the age of 19 (or 24 for a full-time student) or permanently and totally disabled regardless of age
   6. Lived with you for more than half the year (exceptions apply)
   7. They didn’t provide more than half their support for the year

A qualifying relative is:

1. 1. Your biological child, stepchild, adopted child or foster child; you can also claim your brother, sister, stepbrother, stepsister and any of their descendants, or a direct ancestor (parent, grandparent, etc.), they have less than stepparent, aunt, uncle, son- or daughter-in-law, father- or mother-in-law, brother- or sister-in-law
   2. They haven’t already been claimed for the CTC or ODC by you or someone else
   3. They are a US citizen, a US national, or a US resident alien
   4. They aren’t filing a joint tax return with their spouse
   5. They either lived with you for the entire year or are related to you (see below*)
   6. They have less than $4,200 gross income for the year

In addition, you must have provided more than one-half of their financial support and your adjusted gross income (AGI) is not above certain limits.

*One interesting note: a qualifying relative for purposes of claiming the ODC does not have to actually be related to you, but they must have lived with you for the entire tax year.

Step 4:

If you have other income (not from jobs) not subject to withholding (e.g., interest, dividends, retirement income), enter the amount of such income you expect this year on line 4(a). If you expect to have deductions in excess of the standard deduction (i.e., you expect to be able to itemize deductions on Schedule A), use the Deductions Worksheet on page 3 of the Form W-4 and enter the result on line 4(b) of the W-4.

Finally, if you would like to have any additional tax withheld (i.e., more than the amount determined by the above entries to your W-4), enter the amount you want withheld for each pay period on line 4(c).

Step 5:

Sign and date your completed Form W-4 and provide it to your employer.

In summary, your W-4 is filled out in four (4) basic steps:

1. 1. Enter your filing status;
   2. If you have more than one job at a time, you need to use one of the available worksheets;
   3. If you expect to be able to claim a CTC or ODC, enter those credit amounts on line 3; and
   4. If you expect income other than from jobs, deductions in excess of the standard deduction, or would like some extra tax withheld from each paycheck, enter those amounts on line 4(a) – (c).

What are W4 Allowances?

Your federal W4 withholding allowance affect what your employer sets aside for the IRS every time you’re paid. You can claim anywhere between 0 and 3 allowances on the W4 IRS form, depending on what you’re eligible for. 

Generally, the more allowances you claim, the less tax will be withheld from each paycheck. The fewer allowances claimed, the larger withholding amount, which may result in a refund.

Additional tax credits and adjustments:

If you have a trickier situation like additional tax credits or multiple jobs, there are two other worksheets that can make filling out your W4 allowances form a little easier.

Deductions and Adjustments

If you expect to itemize your deductions, claim certain tax credits or income adjustments, use the Deductions and Adjustments Worksheet. This W4 calculator tool comes in handy when you’re claiming head of household, $2,000 or more in child or dependent care expenses, or eligibility for the Child Tax Credit.

Two-Earners/Multiple Jobs

If you’re single with more than one job, or if you and your spouse both work, then refer to the Two-Earners/Multiple Jobs Worksheet.

Note: The worksheets are only to help you figure the amount of withholding allowances you should claim. They are for your own records and shouldn’t be given to your employer.

When do you need a new W4?

When a life change occurs, it’s very important to know what your new W 4 exemptions are and make adjustments to your 2019 IRS tax form. You can change what to claim on your W4 anytime during the year, and some events require you to give your employer a new form within 10 days. Check here and look under “Changing Your Withholding” to see these eligible events.

Valuable and free tax tools like the W4 Withholding Calculator and Tax Estimator can be used to help with what to claim on your W4 and keep track of all your necessary forms, deductions, and tax paperwork in response to new tax laws—or if you start a new job or experience new personal circumstances so you aren’t caught off guard at tax time.

What if I don’t submit a W4 at all?

The IRS requires employers to withhold taxes at the highest rate if you don’t submit a W4. This amounts to the same withholding if you were single and claiming no W 4 exemptions.

Hourly-to-salary tax calculator:

An Hourly to Salary calculator can be quite useful when it comes to figuring how many allowances you should claim on your W4. 

Plugging your hourly wage or annual salary into an efficient hourly to salary calculator helps you better understand not only your gross and taxable income, but also the take-home pay and end-of-year tax burden you’ll face when claiming certain tax benefits—insight that helps you determine what level of federal withholding allowance works best for you.

The right hourly to salary calculator helps you estimate your federal taxes and better know the impact W 4 allowances will have on your paycheck before you complete your tax form.