Every employee, whether full time or part time, has to fill out a W-4 form in order to determine the amount of taxes that are withheld from each paycheck. But if you are switching jobs now and haven't done it recently, you'll notice that the W-4 form has changed. The current Form W-4, released in December 2020, was the first major revamp of the form since the TCJA was signed into law in December 2017. That law made major changes to withholding for employees.
In fact, the W-4 revamp and the tax changes since the TCJA may be a reason to look again at the W-4 you have on file and see if you need to make changes. For example, if you discovered that you owed a lot of money at tax time or were owed a lot of money because you overpaid, revising your W-4 will increase or decrease your take-home pay, depending on how you fill it out. That can put more money in your pocket throughout the year, or help you avoid a big tax hit.
It is also smart to update your W-4 any time you experience a big life change—such as the birth of a child, a marriage or divorce, or a new freelance job on the side. All of these events can have an effect on the taxes you owe.
Key Takeaways
- Your entries on Form W-4, the Employee’s Withholding Certificate, determine how much tax your employer will deduct from your paycheck.
- The more accurately you fill it out, the less you will owe (or be owed) when you file your annual income taxes.
- The new W-4 form lets you adjust your withholding based on certain personal circ*mstances, such as a second job.
Changes in the Tax Laws and Tax Code
One of the primary reasons that the IRS updated Form W-4 was the passage of the Tax Cuts and Jobs Act at the end of 2017. The new legislation produced the largest overhaul of the tax laws in more than 30 years. Besides lowering personal income tax rates, these changes included the removal of personal exemptions, an almost doubling of the standard deduction, modification or discontinuation of many itemized deductions, and expanded child tax credits. Many of the tax changes that were enacted to benefit individuals and families are set to expire in 2025.
How Form W-4 Works
The W-4 form had a complete makeover in 2020 and now has five sections to fill out instead of seven.
The way that you fill out Form W-4, Employee’s Withholding Certificate, determines how much tax your employer will withhold from your paycheck. Your employer sends the money it withholds from your paycheck to the IRS, along with your name andSocial Security number.
Your withholding counts toward paying the annualincome taxbill you calculate when you file yourtax return for the year. That’s why a W-4 form asks for identifying information, such as your name,address, and Social Security number.
What Has Changed on Form W-4
The current version of the W-4 form eliminates the option to claim personal allowances. Previously, a W-4 came with a Personal Allowances Worksheet to help you figure out how many allowances to claim. The more allowances you claimed, the less an employer would withhold from your paycheck.
Allowances were previously loosely tied to personal and dependent exemptions claimed on your tax form. As noted above, the standard deduction was then doubled and personal and dependent exemptions were eliminated as a result of the TCJA.
The current form asks you to record the number of dependents in your household, in Step 3.
It also asks whether your circ*mstances warrant a larger or smaller amount of withholding. For the first time, it allows you to indicate whether you have income from a second job or expect to have tax deductions that you will itemize in your tax return.
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Step-by-Step Gide to Filling Out a W-4:
The W-4 has five steps, including one that is optional. Here’s a step-by-step look at how to complete the form.
Step 1: Provide Your Information
This section asks for the usual personal information that identifies you and indicates whether you plan to file your taxes as a single person, a married person, or a head of household. You'll need to provide your name, address, filing status, and Social Security number. Your employer needs your Social Security number so that when it sends the money it withheld from your paycheck to the IRS, the payment is appropriately applied toward your annual income tax bill.
After completing this step, single filers with a simple tax situation (one job, no dependents, and aren't claiming tax credits or itemizing deductions), only need to sign and date the form, and they are done.
Everyone else has to take a few more steps.
Say your tax situation is simple: You have one job, no spouse, no children, and you don't itemize deductions. Just fill out Step 1 and sign the form. You're done.
Step 2: Indicate Multiple Jobs or a Working Spouse
This step is for people whose circ*mstances indicate that they should withhold more or less than the standard amount. A spouse's income, a second job, or freelance income—which can all increase your tax liability—are factors that can be recorded here. So if you have more than one job or your filing status is married filing jointly and your spouse works, then you haveone of the following three options to choose from:
Option A
Use the IRS’s online Tax Withholding Estimator and include the estimate in step 4 (explained below) when applicable.
Option B
Fill out the Multiple Jobs Worksheet, which is provided on page three of Form W-4, and enter the result in step 4(c), as explained below.
The IRS advises that the worksheet should be completed by only one of a married couple, the one with the higher-paying job, to end up with the most accurate withholding.
When filling out the Multiple Jobs Worksheet, the first thing you will need to differentiate is whether you have two jobs (including both you and your spouse), or three, or more. If you and your spouse each have one job, then you’ll complete line 1 on the form. If you have two jobs and your spouse does not work, you will also complete line 1.
To accurately fill in line 1, you’ll need to use the graphs provided on page four of Form W-4. These graphs are separated out by filing status, so you’ll need to select the correct graph based on how you file your taxes. The left-hand column lists dollar amounts for the higher-earning spouse, and the top row lists dollar amounts for the lower-earning spouse.
For example, let’s look at a person who is married filing jointly. Assuming Spouse A makes $80,000 per year and Spouse B makes $50,000 per year, Spouse A would need to select $7,170 (the intersection of the $80,000–$99,999 row from the left-hand column and the $50,000–$59,999 column from the top row) to fill in line 1 on the Multiple Jobs Worksheet.
If you have three or more jobs combined, between yourself and your spouse, then you will need to fill out the second part of the Multiple Jobs Worksheet. First, select your highest-paying job and second-highest-paying job. Use the graphs on page 4 to figure out the amount to add to line 2a on page 3. This step is the same as the example above, except you’re using the second-highest-paying job as the “lower-paying job.”
Next, you’ll need to add the wages from your two highest-paying jobs together. Use that figure for the “higher paying job” on the graph from page 4, while using the wages from the third job as the “lower paying job.” Enter the amount from the graph to line 2b on page 3, and add lines 2a and 2b together to complete 2c.
For example, let’s assume Spouse A has two jobs making $50,000 and $15,000, while Spouse B has a job making $40,000. Spouse A would enter $3,890 on line 2a (the intersection of the $50,000–$59,999 row from the left-hand column and the $40,000–$49,999 column from the top row). Adding $50,000 and $40,000 together for a total of $90,000, Spouse A would enter $2,220 on line 2c (the intersection of the $80,000–$99,999 row from the left-hand column and the $10,000–$19,999 column from the top row). Adding these two amounts together results in $6,110 for line 2c.
You’ll need to enter the number of pay periods in a year at the highest-paying job on line 3 of the Multiple Jobs Worksheet—for example, 12 for monthly, 26 for biweekly, or 52 for weekly. Divide the annual amount on line 1 (for two jobs) or line 2c (for three or more jobs) by the number of pay periods. Enter this figure on line 4 of the Multiple Jobs Worksheet and line 4c of Form W-4.
Option C
Check the box in option C if there are only two jobs total for the two of you, and do the same on the W-4 for the other job. Choosing this option makes sense if both of you earn about the same. Otherwise, more tax may be withheld than necessary.
Step 3: Add Dependents
This section is where you indicate the number of your children or other dependents. You should fill it out to determine your eligibility for the Child Tax Credit and credit for other dependents. Single taxpayers who make less than $200,000—or those married filing jointly who make less than $400,000—are eligible for the Child Tax Credit.
Technically, the IRS definition of a dependent is pretty convoluted (see IRS Publication 501 for details), but the short answer is that a dependent is a qualifying child or a qualifying relative who lives with you and who is supported by you financially.
Multiply the number of qualifying children under age 17 by $2,000 and the number of other dependents by $500. Add the dollar sum of the two to line 3.
The Child Tax Credit is not taxable and therefore is not relevant to the information on your W-4 form.
Step 4: Add Other Adjustments
In this optional section, you can indicate other reasons to withhold more or less from your paycheck. Passive income from investments, for example, may increase your annual income and therefore your tax liability, or how much you'll owe. Itemizing deductions may lower the amount of taxes you owe. These may be reasons to adjust your withholding on the W-4.
For example, the information you’ve provided in the previous sections might result in your employer withholding too little tax over the course of the year. That could land you with a big tax bill and possibly underpayment penalties and interest in April.
How do you know if this might happen? One likely cause is if you receive significant income reported on Form 1099, which is used for interest, dividends, or self-employment income that you have not yet paid taxes on. Or you may be still working but receiving pension benefits from a previous job or Social Security retirement benefits.
Step 4 of a W-4 allows you to increase or decrease the amounts withheld by filling out one or more of the following three sections:
Line 4(a)
If you expect to earn “non-job” income not subject to withholding, such as income from dividends or retirement accounts, enter the amount in this section.
Line 4(b)
Fill out this section if you expect to itemize your deductions and want to reduce your withholding. To estimate your deductions, use the Deductions Worksheet provided on page three of the W-4 form.
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Line 4(c)
This section allows you to have any additional tax you want to be withheld from your pay each pay period—including any amounts from the Multiple Jobs Worksheet, as described above if this applies to you.
Step 5: Sign and Date Form W-4
The form isn't valid until you sign it.
Remember, you only have to fill out the new W-4 form if you start a new job or if you want to make changes to the amount withheld from your pay.
You can change your withholding at any time by submitting a new W-4 to your employer.
Special Considerations When Filing Form W-4
If you start a job in the middle of the year and were not employed earlier that year, here’s a tax wrinkle that can save you money:If you will be employed no more than 245 days for the year, request in writing that your employerusethe part-year method to compute your withholding.
The standard withholding formula assumes full-year employment, so without using the part-year method, you’ll have too much withheld and you’ll have to wait until tax time to get the money back.
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What Is Form W-4 Used for?
Form W-4 is used by your employer to calculate the amount of money that will be withheld from each of your paychecks and paid directly to the tax authorities as an estimated tax payment. Your annual 1040 tax filing reports the amount you paid in withholding and calculates any amount you still owe or are owed as a refund.
Who Has to Fill Out a W-4 Form?
Every employee is asked to fill out a W-4, usually on the first day of the job. Failure to do so could result in you paying too much or too little taxes.
The form generally only requires re-filing if an employee switches jobs or has experienced a change in circ*mstances that warrants modifying how much money from their paychecks is withheld for taxes.
Do I Have to Fill Out Form W-4 if I Don't Work Full Time?
If it's a new job, yes, you do. Whenever you start a new job, whether full time, part time, or seasonal, you should fill out a Form W-4. You have to report that income and pay taxes on it. The W-4 helps your employer calculate the amount of taxes to deduct from your salary. If you don't pay enough in taxes, you could get a high tax bill and could even have to pay a penalty.
What Is Taxable Income?
Taxable income is the portion of your gross income that the IRS uses to determine the taxes you owe in a given year. Taxable income includes earned income—wages, salaries, bonuses, and tips—as well as investment income and various types of unearned income, including cancelled debts, government benefits (such as disability payments), and lottery payments.
How Can I Lower My Tax Liability?
There are a number of ways that you can reduce your tax liability so that you pay less in taxes. These include contributing to an employer-sponsored retirement plan, like a 401(k), a health savings account (if you have a high-deductible health insurance plan), and a flexible spending account. Putting money into a 529 plan for your kids' college education can also help reduce your tax liability, but only for state taxes, not federal taxes.
The Bottom Line
Employees are required to fill out W-4 forms because the IRS requires people to pay taxes on their income throughout the year, as they earn it.
If you have too little tax withheld, you could owe a surprisingly large sum to the IRS in April, plus interest and penalties for underpaying during the year.
If you have too much tax withheld, your monthly budget will be tighter than it needs to be. Also, you’ll be giving the government an interest-free loan when you could be saving or investing that money. You won’t get your overpaid taxes back until the following year when you file your tax return and get a refund.
