You can’t avoid federal income taxes. No matter who you are or who you work for, taxes will be withheld from your paycheck—which can sometimes amount to a sizable chunk of your earnings.
Fortunately, there’s the W4 tax form, which allows a bit of latitude when it comes to what your employer can withhold each new payday.
Claiming W4 allowances is one of the biggest ways you can not only affect your tax bill,but also how much you get to take home—making it important to know what allowances do and how to make them work best for your unique tax situation.
What Is Tax Withholding?
Any time you start a new job, you fill out a W4. Known in tax-pro speak as the Employee’s Withholding Allowance Certificate, this form essentially lets your new employer know how much of each paycheck you want set aside for the IRS.
Employers are required to withhold taxes in every state, though there are numerous state and local governments across the country that do so as well.
The amount withheld from your check depends mostly on 1) how much you make and 2) how many W4 allowances you claimed at the beginning of your tenure. Basically, claiming more allowances means fewer withholdings and bigger paydays.
What Exactly are W4 Allowances?
Allowances are more or less exemptions from paying a certain amount of federal tax. When you qualify for an allowance, you can legally claim that exemption on your W4—and a little less will be withheld from your paycheck.
Each W4 provides a brief explanation for each allowance available to the taxpayer. The number you can claim depends on your particular tax situation.
Allowances may be claimed:
- For yourself, if no one can claim you as a dependent.
- If you’re the head of household.
- If you’re married and filing a joint tax return at the end of the year.
- If you’re married with one or more dependents.
How Many Should I Claim?
Determining the ideal number of allowances is based not only on how many you qualify for, but also on your financial situation, your short- and long-term needs and the tax bill you don’t mind facing at the end of the year.
For instance, claiming too many allowances may put more money in your pocket now, but it will also lead to less being sent to the IRS—meaning you will likely owe more taxes and possible IRS penalties when next April rolls around.
On the other hand, claiming too few allowances may help you stay caught up with the IRS throughout the year, but it also results in smaller paychecks. This, in turn, means less to pay bills and spend on items you might otherwise afford.
Can I Update My W4?
Absolutely. In fact, the IRS recommends doing so any time you experience a major life event. This can include anything from getting married and having a child to you or your spouse getting or losing a job—things that directly affect the tax you owe at any point during the year. The IRS also recommends updating your withholding allowance any time tax reforms are enacted, ensuring that you're not surprised when completing your taxes.
To learn more federal taxes and what works best for your tax situation, visit your local Liberty Tax® location today.