What is a W-4?
One of the first questions people often ask is, “What is a W-4, exactly?” Despite everyone’s exposure to the form, very few people truly understand the purpose of a W-4; it’s merely one form in a mountain of new hire paperwork. Thus, it may surprise many to learn, the W-4 can have a powerful influence on your tax bill.
The W-4 form, officially titled, “Employee’s Withholding Certificate,” is an IRS form used by employees to direct employers to withhold a certain amount of tax from each paycheck. On the flipside, employers use W-4s to calculate payroll taxes and to pay taxes to the IRS for employees. W-4s only need to be filed when an employee starts a new job or would like to change the amount of their withholdings.
Your KerberRose Trusted Advisors have compiled the following advice to help you make your W-4 work for you.
How to Influence Your Tax Return
Depending on how an employee fills out their W-4, they could end up with a balance due or a refund on their individual tax return.
If an employee would like to reduce the amount of any additional tax due, they can elect for more tax to be withheld during the year. This action will result in the employee paying more tax during the year and less at tax time, perhaps even resulting in a tax refund. To have more tax taken out of paychecks during the year, W-4s can be adjusted in the following ways:
- Decrease the number of dependents claimed in Step 3.
- Increase the amount withheld on line 4(c) in Step 4.
Some employees may want to see larger paychecks throughout the year, instead of a larger refund at tax time. These employees should elect to minimize the amount withheld from each paycheck. To have less tax taken out of paychecks during the year, W-4s can be adjusted in the following ways:
- Increase the number of dependents claimed in Step 3.
- Reduce the amount withheld from other (non-job) income on line 4(a) in Step 4.
- Increase the number of deductions on line 4(b) in Step 4.
- Reduce the amount of tax withheld on line 4(c) in Step 4.
For an employee to be exempt from their employer withholding federal incomes taxes from their paycheck, it means two things must be true:
- The employee received a refund of all the federal income tax withheld the previous year due to a lack of tax liability.
- The same situation will reoccur in the current year.
Employees claiming a withholding exemption need to write “exempt” in the space below line 4(c) in Step 4. Exempt employees need to file a W-4 every year if they wish to continue to be exempt from withholding. W-4 withholding exemption only applies to federal taxes; exempt employees will still have Medicare and Social Security Taxes taken out of their paychecks.
Additional W-4 Tips
Its’s okay to play around with your W-4 withholdings; you can submit a new W-4 to your employer at any point during the year. In fact, it’s even recommended to tinker a little with W-4 withholding; if an employee sees how much is withheld from one paycheck, they can estimate how much withholding throughout the year will be necessary to cover their tax bill.
Currently, the W-4 is built to only withhold exactly what an employee’s tax liability would be based upon how it is completed. Thus, it’s important to understand the form. Anytime a W-4 is completed or changes are made, it’s a good idea to follow up with a review of the affected paystub to make sure the withholding seems reasonable and works in your favor.
If you have any additional questions about the W-4 form, such as your exemption status or how the form can best work in your favor, contact a KerberRose Trusted Advisor today!