IRS W4 Form Explained
In the U.S., employees are required to pay taxes to the IRS on their earned income.
However, rather than being required to pay their total tax liability when they file their federal income tax returns, employees can incrementally pay their estimated tax liability by filling out IRS W-4 so their employer can withhold the indicated amount from their paychecks throughout the year.
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Key Takeaways:
- IRS W-4 Form, Employee’s Withholding Certificate, is a tax form employees fill out to inform their employer how much to withhold from their paycheck for taxes.
- The IRS offers a Tax Withholding Estimator tool that taxpayers can use to observe how adjusting their tax withholding impacts their take-home pay, tax refund, and tax due.
- Taxpayers who accurately estimate their tax withholding will not owe a tax liability nor be issued a tax refund. Taxpayers who overestimate their tax liability will have lower paychecks and will be issued a tax refund. Taxpayers who underestimate their tax liability will have higher paychecks and will owe tax payments.
- Taxpayers should fill out a new W-4 form if they experience a life change such as changing jobs, starting a second job, their spouse changing or starting a job, getting a raise, getting married, getting divorced, having a baby, or adopting a child.
What Is The W4 Form?
IRS W-4 Form, Employee’s Withholding Certificate, is a tax form filled out by employees to inform their employer how much to withhold from their paycheck for tax purposes.
By adjusting their tax withholdings, the taxpayer can influence whether they will owe money, be issued money as a tax refund, or will have accurately paid their tax liability for their earnings during the tax season, as well as their take-home pay each pay period.
How To Calculate W-4 Tax Withholding
Taxpayers can use the IRS Tax Withholding Estimator tool to estimate their federal income tax withholding. This tool allows them to observe how adjusting their withholding impacts their take-home pay, tax refund, and tax due.
To use the Tax Withholding Estimator tool, taxpayers will need the following information:
- Paystubs
- Other income information
- Most recent tax return
Impact Of W-4 Tax Withholdings
The information individuals report in their W-4 forms will impact their take-home pay, tax liability, or tax return during the tax season.
Accurately Estimated Tax Withholdings
If taxpayers accurately estimate their tax withholdings, this means that the amount they requested their employer to withhold from each paycheck accurately represented how much they owed the IRS in income taxes.
In this situation, their take-home pay is the actual amount they earned. Additionally, when they file their tax return, they will have already paid their tax bill, and will have no balance due nor will they receive a tax refund.
Overestimated Tax Withholdings
If taxpayers overestimate their tax withholdings, this means that they requested their employer withhold more money in taxes than was actually required. In this situation, their paychecks are slightly smaller.
However, when they file their tax return, they will find that they paid the IRS too much money, so the excess amount will be returned to them as a tax refund.
Underestimated Tax withholdings
If taxpayers underestimate their tax withholdings, this means that they have instructed their employer to withhold less money from their paychecks.
In this situation, their paychecks will be slightly higher. However, when they file their tax return, they will find they still owe the IRS money for taxes they did not pay throughout the year.
When To Fill Out A New W-4 Form?
IRS Form W-4 is not a tax form that necessarily has to be submitted every tax year. Instead, taxpayers should fill out and submit a W-4 form if they have experienced a life change that impacts how much tax they would like their employer to withhold from their paychecks.
Here are some instances during which taxpayers may have to fill out a new W-4 form:
Incentives, Subsidies, and Rebates Changing Jobs
Taxpayers who change their jobs will have to fill out a new W-4 form to inform their employer about their tax withholding preferences. Once this form is completed, they will not have to fill it out again unless they wish to make adjustments to their tax withholding.
Started A Second Job
Taxpayers must fill out an IRS W-4 Form each time they are hired for a new job. If they work as an employee for more than one company and have two or more W-4 forms, they may benefit from adjusting their tax withholdings to ensure an appropriate amount is withheld from their paychecks that is not too much or too little.
Got A Raise
Earning a raise at a job, especially if this raise is more than $10,000 in regular wages, is a situation that may warrant a taxpayer updating their withholding allowances using IRS Form W-4.
Got Married
Taxpayers who get married to a person who also works as an employee should consider adjusting their tax withholdings by filling out a W-4 form. If they plan to file taxes jointly with their spouse, they should calculate and coordinate their W-4 allowances to suitably balance the deductions withheld from their income.
Got Divorced
Getting divorced may involve a taxpayer’s filing status and tax rates changing, which can impact their tax liability during the tax season. For this reason, newly divorced taxpayers should evaluate their W-4 withholdings.
Had a Baby Or Adopted A Child
Giving birth to a baby or adopting a child can significantly impact a person’s taxes, such as the potential to claim tax credits, such as the Child Tax Credit or the Adoption Tax Credit, which lowers their tax bill. For this reason, members of growing families should consider adjusting their withholding tax during these life changes.
When Are Taxpayers Required To Submit A New W-4 Form?
While sometimes filling out a new W-4 form is optional, other times it is mandatory. Taxpayers are required to submit a new W-4 form to their employer if they experience one of the following changes in their filing status:
- Married filing jointly to head of household
- Qualifying widow(er) to head of household
- Married filing jointly to single or married filing separately
- Qualifying widow(er) to single or married filing separately
- Head of household to single or married filing separately
How To Fill Out A W-4 Form
There are 5 steps for filling out IRS Form W-4, each requiring the taxpayer to enter specific information.
Step 1: Enter Personal Information
The first section of the Employee’s Withholding Certificate is where taxpayers must enter their name, address, Social Security Number, and filing status.
Step 2: Multiple Jobs or Spouse Works
The second section of Form W-4 is where taxpayers can indicate if they have more than one job or if they are married, filing jointly with a spouse who also works, as this could indicate that more or less tax should be withheld.
Step 3: Claim Dependent and Other Credits
The third section of the W-4 tax form is where taxpayers should indicate the number of dependents or children they have to factor in the Child Tax Credit.
Step 4 (optional): Other Adjustments
The fourth section is an optional area for taxpayers to indicate other reasons that more or less money should be withheld from their paycheck, such as if they have income from investments that would increase their tax liability, causing them to want more tax withheld, or if they itemize their deductions, which could lower their tax liability, and therefore reduce the amount they prefer to have withheld.
Step 5: Sign Here
The fifth section of the form is for the taxpayer to place their signature and the date.
W-4 tax forms impact whether an employee will owe taxes or be issued a tax refund during the tax season, as well as how much their take-home pay is on each paycheck. If you have any questions about tax withholding calculations or optimization, set up a free telephone consultation with an expert tax preparer at Ideal Tax today.
Luis serves as the Director of Operations for Ideal Tax, overseeing a multifaceted team including case management, tax professionals, document specialists, customer support, training, and development.
