When filling out a W-4 form at the beginning of a new job or after a major life event, like the birth or adoption of a child, or getting married, you need to know the appropriate number of allowances to claim.
It’s crucial to adjust your allowances so that they’re just right for you.
Too many allowances could leave you with a tax bill at the end of the year with the Internal Revenue Service which may result in a penalty for you.
But if you claim fewer exemptions, the government will give you more of your money back.
Things you need to keep in mind before claiming allowances
Before the year 2020, changing the number of allowances claimed on Form W-4 was one of the most significant ways to modify the amount of take-home pay.
Your specific circumstances will determine the optimal allowances package for you. The elimination of the W-4’s allowances section, however, has made it easier to complete.
However, a financial advisor can help you optimize a strategy for your finances if you need assistance figuring out your taxes.
More allowances reduce payroll tax. Calculate your personal allowances using the W-4 worksheet.
Need to know about tax withholding
Tax withholding can help explain allowances. When you get paid, your employer “withholds” a certain amount.
Since your taxes will be withheld, you can spread out your payments throughout the year.
All businesses must withhold income tax. Local governments may also require withholding taxes
Pensioners and those who win gambling, bonuses, or commissions must have income withheld. Self-employed business owners, contractors, and others must withhold taxes. Estimated tax payments can help prepare for tax season.
Your paycheck taxes are based on your income and W-4 form. Withholding is affected by a working spouse, multiple jobs, and dependents. Include deductions and withholdings.
You can tell your employer how much to withhold from your paycheck by completing a W-4 form. When you start a new job or have major life changes like getting married or having a child, update your W-4.
Filing an exempt if you not eligible
Don’t be surprised by a hefty tax bill and potential penalties if you claim exempt on Form W-4 when you aren’t eligible to do so. You may be subject to a tax penalty if both of the following are true:
- On Form W-4, you can declare withholding allowances that will result in less tax being withheld from your paycheck.
- When filling out your W-4, you made those assertions for no good reason.
Claiming exempt status on a W-4
An employee who qualifies can use Form W-4 to request no federal income tax be withheld.
The worker must have had no tax liability in the prior year and expect none in the current year for this exemption to apply.
Form W-4 withholding exemptions are only valid for the calendar year they are submitted.
If an employee is exempt from withholding this year but wants to be next year, he or she must submit a new Form W-4 by February 15.
This date will be moved if it falls on a weekend or federal holiday.
If the worker doesn’t provide a new W-4, treat them as single or married filing separately, with no dependents or other adjustments.
If the worker doesn’t provide a new W-4, you should treat their tax withholding as if they were single or married filing separately, with no dependents or other adjustments, if they don’t provide a new W-4.
Indication of invalid W-4 form
Unauthorized changes to Form W-4 invalidate it. This includes removing certification language, defacing the form, or writing other than the requested entries.
A Form W-4 is invalid if an employee indicates it’s false when submitting it. Don’t use an invalid Form W-4 to calculate tax withholding.
Say it’s invalid and ask for another. If the employee doesn’t provide one, withhold taxes as if he or she is single or married filing separately.
If you have a valid Form W-4 from before, withhold as before.
Results in Changing W-4 allowances
Review your W-4 and tax situation at the beginning of a new tax year, after major tax code changes, or after major life events.
Anytime during the year, you can change your W-4 and tax withholdings.
Generally, later-year changes reduce tax impact. You may need to update your W-4 form or make estimated tax payments. Changes should be communicated to employees immediately.
Not updating your W-4 or updating it incorrectly can have consequences. You may lose money due to deductions or be disappointed by how little you earn back at year’s end. All of this affects your allowance submissions.