Importance of the W-4 Form

What is Form W-4?

A W-4 Form is what you complete for your employer to determine how much money should be withheld from your paycheck for federal income taxes. It’s also a document that is sent to the IRS. If you are or were an employee, or will be, you will see this tax form—even if you don’t recognize it.

This is not a form that should be completed by self-employed taxpayers, just those who work for employers. Filling out your W-4 Form is important because it not only affects how much your paycheck amount is, but it will help you avoid owing a balance come Tax Day or overpaying the government throughout the year. 

There have been some bigger changes to the W-4 in recent years, which you might have missed. In 2020, the IRS made significant changes to this form, which hadn’t been updated since the 1980s. The IRS made these changes to simplify the process of reporting what you want withheld on your paycheck. The updated W-4 also allows you to file as Head of Household and removed the option to claim exemptions. There were other changes that could impact as well and you need to know about them, especially if you have been disappointed by your tax refund amount in any way.

What’s the purpose of a W-4?

As an employee, you cannot control your Social Security and Medicare taxes withheld from your pay, or any mandatory state fund contributions, such as family leave and disability funds. However, you can control how much federal and state income tax is automatically withheld from each paycheck by completing your Form W-4. This form helps you estimate your annual income, deduct dependent-related benefits, and request any additional dollar amounts to be withheld. In summary, the W-4 Form tries to match the taxes you are expected pay for the year when you file your tax return.

The tax withheld is based on several factors including your filing status, how often your employer pays you, the expected income from the job, and your other income and deductions.

How do you fill out a W-4?

While the W-4 seems simple, do not be fooled: it still has many important parts and key fields to determine how much tax is held from your pay.

Step 1: At the top of the form, enter your personal information.

• This includes things like the correct spelling of your legal name (no nicknames) as well as your home mailing address, Social Security number, and tax filing status.

Step 2: In this area of the form, you review your life and earnings situation.

• Here, you will account for multiple jobs or if your spouse works, because that has an impact on how much total income (on which your tax rate is based). If your spouse works, that can have the same impact.

• This area should only be completed if you had more than one job during the year or if you’re Married Filing Jointly and your spouse also works. It’s more “guidance” than actual lines for information. But it is critically important to understand and complete if you have more than one stream of income, either from more than one job you work or if your spouse works. All of this determines your final taxes for the year so you can have enough withholdings to cover your income tax bill and not pay more in taxes when you file.

• If you don’t want your employer to know that you have another job, or that you get income from other non-job sources, you have a few options:

• On line 4(c), you can tell your employer to withhold extra.
• If you don’t factor the other income on this form, you can just send the IRS estimated tax payments directly.

But do not ignore these important guidelines in section 2 if you have more than one stream of income that will be on your or your joint tax return.

Step 3: Here is where you account for the  dependent children eligible for the child tax credit.

• If your total income is under $200,000 (or $400,000 if filing jointly), you can enter how many dependent children under age 17 you have and multiply them by the credit amount listed on the form.

Common mistake within this section:

• If you’re both working, only one of you should claim the children, and generally it’s whoever has the higher paying job. That’s because if you both allow for the child-related tax credits on your W-4, you could end up not withholding enough and then must pay the IRS instead of getting a refund during tax time. Pay attention to this area, and coordinate with your spouse or other job, if you have one, or face the risk of refund shock (and NOT the good kind).

Step 4: This is the place to make other adjustments to refine your withholding amount. It’s where you can account for other income you receive from your employer that you’d like to take adjustments on, including:

• Other income: Amounts added here will increase your withholding
• Deductions: Amounts added here will decrease your withholding
• And the most important line on the form as far as I am concerned LINE 4(c) Extra withholding – Amounts added here will increase your withholding

• During the year, as you do your mid-year and year-end tax projections and decide, for whatever reason, that you want a few extra dollars withheld from your pay to increase your refund, reduce balance due, or just have and extra cushion—you include those amounts here. An extra $25, $50, or $100 a paycheck can add up over time and help in your complicated tax world. You will want to do so if you have an extra job, another job, are self-employed, your spouse is not having enough withheld, or just want a bigger refund. It is one of the most important lines to control your tax refund or lack thereof.

Step 5: Sign and date the document or e-sign it on your company HR system.

Can I adjust my W-4?

Yes! Sometimes people think they can only touch their W-4 Form when they first accept their job, but that’s not true. The form and how much you withhold can be adjusted more than once. In fact, you can likely do it fast and easily, remotely, or in person. You can adjust your W-4 once a year or once a month, generally often as you like and without limit.

We recommend reviewing your W-4 every year or at least every two years. You should also have a tax expert look at it when you file your return each year.

At minimum, you should consider updating your withholdings on your W-4 and make adjustments if any of these events happen:

• Early in the calendar year if you had tax refund disappointment at tax time.
• Life change increasing or decreasing your other income.
• If you are working multiple jobs or pick up a side hustle, even if that’s self-employment income.
• When there is a tax law change that directly impacts you, it might not automatically flow through your pay withholding.
• When you have a major life change, like getting married or divorced, having or adopting a child as well as when your child reaches the age of 17, buy a home, retire and many other changes.
• If you have a change in your total wage amounts, like if you or you and your spouse start or stop working a second job.
• If you receive interest income, dividends, capital gains, self-employment income, or IRA distributions or other income with no tax withholding that can cause you to owe at tax time.

Are there variations of W-4 Forms?

Yes. While only a Form W-4 can be given to employers, there are other forms in this series: W-4P for retirement income and W-4V for governmental payments like Social Security benefits and unemployment. Withholding is voluntary for these types of income, which is recommended since they are subject to income tax. If you don’t have tax taken out during the year for these types of income, you’ll need to pay it when you file your taxes, which could lower your refund or potentially cause you to owe additional taxes, penalties and interest.

Additionally, there is a state W-4-equivalent form you should not overlook if you live in a state with income tax. For instance, New York residents must fill out an IT-2104, which has the same purpose as a federal Form W-4, except it's for state and city taxes.

What common mistakes should I avoid when filing out the W-4?

First, don’t worry. You can correct mistakes after you’ve filled out the W-4. It’s not a document that can’t be updated. Here are the most five most common mistakes we see when it comes to the W-4 Form:

• Not using the best filing status for withholding. The filing status used on the W-4 is strictly for withholding purposes and has no bearing on the filing status used on your tax return,
• Not making sure the form reflects your current dependents; especially with complex family structures with divorced or shared custody situations,
• Not adjusting it when you have an increase or decrease in your wages,
• Only looking at the form once and then never touching it again,
• Making an error that claims too much or not enough, and then not getting the paycheck amount or tax refund size you expected.

Also, keep in mind that a W-2 and a W-4 are different documents.

• A W-2 form is a wage and tax statement that details how much you were paid by an employer during the year. If you have, or had, a job at any time of the year, you should receive a Form W-2 from each employer the following January containing income information to report on your tax return.

Top tips to complete the W-4

First and foremost: if you have questions, ask. You can ask our team of Tax Pros and you can ask your employer for guidance. Don’t simply guess because that can lead to silly errors, giving you results you don’t want for your paychecks or tax refund. The importance of filling out the W-4 Form accurately and knowing you can change it as often as you like to more accurately reflect the tax outcome you want is good to understand. At Jackson Hewitt, we’re here to help you, you don’t have to guess. Find an office near you and work with a Tax Pro today.

Next, income taxes aren’t going away and you’re going to fill out a return each year for decades. It should be taken seriously, especially when you’re going through changes in your personal life. Form W-4 shouldn’t be a ‘set it and forget it’ form. You can adjust and work with your employer until you’re happy with your paycheck and tax refund amounts.

Lastly, check out the free IRS withholding calculator on IRS.gov. The calculator considers your income, deductions, and credits to provide you with an estimate.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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