Have you started a new job but have no clue on how to fill out your W-4? I’ve been there many times. I’m not sure why they don’t teach us this in school. Here is the complete illustrated guide to filling out your W-4 step by step.
The W4 is one of the least complicated offerings from the IRS. In this article, we’ll cover the correct inputs for each field and go over when to claim dependents and exceptions.
IRS form W-4 is used for an employee’s income withholding for tax purposes. The form works based on allowances claimed for any number of reasons.
It is essential that you correctly complete the W-4 form, if you do not file it, or file it incorrectly, the IRS may withhold your income at the maximum percentage permitted.
Because tax law changes in some way every year, employees should consider refiling a W-4 each year, especially if their life situation changes.
Table of Contents
Filing out your W-4: Step by Step
For demonstration purposes, I will create a fictional character and fill his information as we go along. Here is our fictional characters info.
Fictional character below:
John Galt
123 Anywhere St.
Grand Haven, MI
49412
Social Security# 000-12-3456
Box (1) and Box (2):
Box (1):
Fill in your first name, note that Box (1) includes “Last Name” and “Home Address” and “City or town, state, and ZIP code.”
Box (2):
Fill in your Social Security Number.
John would complete the form as follows:
Next, we move on to the next sections.
Box (3) and Box (4):
Box (3)
When filling this box, it’s essential to keep in mind a few things:
- Select SINGLE if you are:
- Choose this if you aren’t married, or who are divorced or legally separated under state law.
- Select MARRIED if you are married
The third option, “Married, but withhold at a higher single rate” takes into account some minutia that the IRS permits. Generally speaking, you will select the separate filer status to approximate your incomes taxes more closely. The separate filer status also has the effect of reducing your tax bill.
Box (4)
This box is used when you’re filing for as a newlywed person with your spouse’s last name, or an instance such as you’re filing under an assumed name or an alias.
The IRS requires you to notify them by selecting this box and to notify the Social Security Administration of your name change and to obtain a new card to that effect.
If Mr. Galt is Single (unmarried, divorced), he will complete the section as such:
If Mr. Galt is Married (married, separated), he will complete the form like this:
If Mr. Galt wished to take advantage of the higher Single rate for withholding, he’d select the third box:
Single Rate Explained
You will want to choose the higher Single Rate when you are married and anticipate a higher tax burden at the end of the year, examples of when this might happen include alternative streams of income such as investments (stocks, bonds, taxes mutual funds, etc.) or gifts or even inheritances.
Selecting the higher single rate effectively puts you into the 25% tax bracket at a minimum and will raise the amount of money withheld by your employer.
At the end of the year, if there is excess, you still receive the refund, but if you owe taxes, the money paid in throughout the year will lessen the payment due.
Name Change Explained
An additional note regarding Box (4). When you change your name, the Social Security Administration does not notify the IRS, they anticipate you will do this. When filing for the first time under your new name, you need to select Box (4), if for example, Mr. Galt wished to change his name to Mr. Taggart, he would choose Box (4) in addition to his selection in Box(3).
The result of this is that the IRS will record your new name with the Social Security number that you’re filing under and update their computer systems. The IRS provides guidance to married couples who are filing jointly. However, this advice applies to anyone who has had a name modification, see here (link).
Boxes (5), (6), and (7)
Boxes (5), (6), and (7) are the real meat of the W4. We’re going to take them one by one, and I will show you examples of when and how to modify these numbers.
Box (5)
This box deals with the “total number of allowances” that you’re claiming.
What is an allowance? An allowance is an exemption that keeps money going to you instead of being withheld by your employer for the IRS. A filer will generally claim up to two allowances, succeeding in the order 0, 1, or 2.
Choose 0 if you meet any of these criteria:
- If you are a child and your parent or guardian is claiming you as being dependant on them.
- If you want a higher end of year tax refund as opposed to having to save to pay taxes.
Choose 1 if you are single and have no complex tax filings
Choose 2 if you meet any of these criteria:
- If you are attempting to have no tax refund
- If you are working two jobs with two separate W4 filings
- If you are married and have no children
Generally speaking, once you have children you claim each as an allowance on one spouse’s return. For example:
If John Galt has two children and is married, he would claim four allowances, completing the section as such:
Box (6)
Box (6) is for people who want to “save” money by withholding extra. Similar to claiming to choose more allowances, use this box to have your employer set aside additional funds to credit the IRS, this action will offset tax burdens at the end of the year and is popular among persons with substantial outside income. Some may find this a nice way to “save” money for a future purchase at the end of the year too.
Box (7)
Box (7) is for withholding exemptions. Generally, you would only file exempt if you were a student, a part-time worker making under $12,000 a year, or if you are 65 and older. It is important to note that filing exempt on your Form W4 applies discretely to Federal Income Tax and bears no effect on the collection of Social Security, Medicare, or state and local income taxes.
Examples of John filling out Boxes (5), (6), and (7)
Below are some sample W4 forms for John Galt, using some common themes. These examples are meant as examples only and should not be used without consulting a tax attorney.
For the “Married” samples: It is important to note and to remember that only one spouse may claim the allowances per couple. If John and his wife claimed two allowances each, then they would have too little tax withdrawn from their earnings, and they would almost certainly owe taxes at the end of the year. Good practice holds that the highest earner will claim the most allowances, freeing more of their money for the family’s usage.
Single, filing alone.
- For most single filers, this is the way to go. Selecting 0 allowances will permit your employer to withhold more, but you will receive a larger year-end tax refund. If you wind up owing taxes (from investments or other gains), the burden could be substantially less.
Married
- For most married persons, this route is the default. You use two allowances, one for your spouse.
Married, filing under the Single Rate clause
Recall that electing to use the single filer tax rate causes your employer to withhold more of your money. More money is held to lessen a tax burden at the end of the year if you anticipate owing taxes.
These held funds from your paycheck work like a savings account, where through holding more of your paycheck back in taxes, you will work towards paying down your eventual tax burden. Sometimes you can even have some money returned through a refund.
The above example is what my wife and I do for our personal taxes. I do not like the idea of having to write a check at the end of the year come tax time. I am more than happy to give an interset free lown to the government in order to give me some peace of mind at the end of the year.
Married with one child
- Married filers with children should claim one additional allowance per child. For example, one child would cause a married person to claim three allowances, one for each married parent and one for the dependent child.
Married with four children
In keeping with the theme, here we are claiming four children for a total of six allowances (two parents plus four children equates to six allowances). Generally, one allowance per child is permissible.
Married with additional withholding
Whether you are single or married, electing to have additional funds withheld acts like savings account for you to put money away. These funds are primarily intended to be used against tax burdens (such as investment or residual income) but are more frequently returned to the taxpayer through the refund. This “savings” method works best for individuals who do not possess the self-control to save money through traditional means.
Single and exempt
Finally, if you are claiming exempt status, you can leave Box (5) and Box (6) empty and write in “Exempt” in Box (7). Doing this informs your employer that you are “tax exempt” as it pertains to the Federal Income Tax.
Note: This does NOT apply to state and local income taxes, nor does it apply to Medicare or social security withholding. Do not claim exempt status without consulting a tax attorney if you are under 65 and making more than $12,000.
Final thoughts…
Improperly completing your Form W4 can land you in trouble with the IRS. If it is not completed correctly, you will be taxed at the highest single taxpayer percentage. While some may not mind this, it is often inconvenient for many. The IRS may also levy penalties against you and interest for improperly completing your W4 form.
Resources:
- IRS Withholding Compliance Questions and Answer, click here.
- 2018 IRS Withholdings Tables Frequently Asked Questions, click here.
- W-4 Form, click here.
