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Playing the Numbers Game with Tax Withholding
Receiving a W-2 form in the mail is a familiar experience shared by millions of employees in the country. The slip arrives in January or February and details your earnings and taxes withheld from earnings for the prior calendar year. But in order to get the W-2, you need to fill out the W-4 form so your employer will withhold the correct amount of taxes. As a working mom, you'll get more withholding allowances than a single person and have less earnings withheld.
What Is a Form W-4?
A W-4 Form, Employee's Withholding Allowance Certificate, is a form published by the Internal Revenue Service. Every new employee is asked to fill out this form so that the employer knows how much of earned income should be withheld for the individual's taxes. The withholding amount depends on the number of allowances you claim.
What Is Withholding?
Since the basic purpose of a W-4 is to allow your employer to calculate appropriate tax withholding for you, it's important to understand what withholding is. Withholding means having part of your earnings held back from your paychecks and, instead, sent to the government to apply to your annual tax bill. Even if you are retired rather than actively employed, you may have taxes withheld from retirement pensions.
What's the Difference between a W-2 and a W-4?
Both of these forms begin with a "W," but they are not identical. You fill out the W-4 form, listing allowances and deduction, to give your employer as a basis for calculating how much of your income should be withheld for taxes. The employer goes ahead and withholds the income and sends it to the taxing authorities. The employer then sends you a W-2 form early in the calendar year telling you (and the IRS) how much you earned the prior year and how much of those earnings were withheld for taxes.
How to Fill Out a W-4 Form?
You will be asked to fill out a W-4 form whenever you begin new employment. The form requires you to set out your identifying information in lines 1 through 4. Then you specify how many allowances you are taking.
You'll want to start by working through the personal allowances worksheet. This will tell you how many allowances you can claim. The more allowances you claim, the less of your earnings are withheld for taxes. If you are single and use the standard deduction, this will be the only worksheet you need. Insert the total on line H of the worksheet.
If you plan to itemize deductions or claim certain credits or income adjustments when you file your taxes, you also need to work through the next page of the worksheet. This is the deductions and adjustments worksheet. On this form, estimate your adjustments to income, like paying alimony or putting money into a health saving account. You also figure out your deductions, like charitable gifts or mortgage interest. Because these adjustments and itemized deductions reduce the tax you owe, you can also use them, on this worksheet, to reduce the amount you have withheld for your taxes. Total your deductions on line 10 of the worksheet.
On Line 5 of the W-4 form, enter the number from line H on your personal allowances sheet, if you only filled out the personal allowances worksheet. Otherwise, if you itemize deductions and filled in the deductions worksheet, enter the number from line 10 on your deductions and adjustments worksheet.
What Should I Put on my W-4?
The idea of your W-4 is to have your employer withhold the amount you need to pay in taxes and nothing more. Any extra money that is withheld from your salary and returned to you after you file your tax return is money you cannot use during the year. You cannot invest it or use it for your own purposes.
While it is tempting to try to beef up your allowances and deductions to reduce the amount of withholding, you don't want to have to dig into your pocket at tax time either. Honestly filling out the form is your best bet.
How Do Allowances Work?
Allowances work like this: the more allowances you have, the less tax your employer withholds from your earnings and sends to the government. When you fill out the allowances worksheet, you enter the appropriate numbers in each line from A through G based on your personal situation, then total your allowances on line H. If you are single and have one job, you enter 1 for line A and 1 for line B. Your total allowances will be 2.
If you itemized deductions, or are married or claiming dependents, you will approximate your appropriate withholding more closely by working through the deducations and allowances worksheet and/or the two-earners/multiple jobs worksheet.
Do I Claim 0 or 1 on my W-4?
Generally, you do not claim 0 or 1 on your W-4. Even if you are single and working only one job, you claim 2 allowances. You are allowed to claim less exemptions that you are entitled to, so you can do that if you like, but it rarely makes sense to have your employer withhold more money than you will owe.
Note that claiming 0 deductions increases the amount of income that is withheld for taxes. It does not mean you are exempt from withholding. You are exempt only if you had no tax liability the prior year and expect to have none the current year. In that case, you can write "exempt" on line 7. Note that this means only you are exempt from income tax withholding, not Social Security or Medicare taxes.
What Does the Total Number of Allowances You Are Claiming Mean?
Each allowance you claim reduces the amount your employer withholds from your earnings to send to the government. A single person with one job claims two allowances on the W-4 form. Married people or those with dependents claim more allowances and have less income withheld.
Teo Spengler has worked as a trial lawyer, a teacher and a writer at various times in her life, which is one of the reasons she likes to write about career paths. Spengler has published thousands of articles in the past decade including articles providing tips for starting a job or changing careers. Her work has appeared in numerous online publications including Legal Zoom, eHow Business, Livestrong, SF Gate, Arizona Central, Houston Chronicle, Navy Federal Credit Union, Pearson, Quicken.com, and Working Mother websites. She holds a J.D. from U.C. Berkeley, an M.A. in English and an M.F.A. in fiction.