Avoiding Surprises at Tax Time: The W-4 Form

The tax filing season can often be filled with angst as many filers are unsure whether they will receive a tax bill, a refund, or make it through unscathed. Fortunately, much of this stress can be avoided by properly filling out (or updating) your W-4 form. Employees are required to fill out their W-4 forms when starting a new job. As a result, this form is often included amidst a mountain of paperwork or e-forms and can go overlooked. In some instances, this form was filled out several years ago and has been long since forgotten as you’ve remained with the same company. However, buried in the details of this 4-page document are the instructions that can help you gain a better understanding of what to expect when filing your annual tax return.

The W-4 form collects pertinent tax filing information that is unknown to your employer such as filing status, deductions, etc. This information helps your employer determine how much federal income tax should be withheld from your paycheck based on your responses. Many of the line items are representative of questions or calculations one would see on their 1040. In essence, the W-4 helps your employer capture a high-level picture of your filing status and projected taxable income as well as deductions and break it down into a “per paycheck” amount of federal taxes to be withheld.

At the end of the year, your total federal withholdings are included on your W-2. This amount will help determine if you are owed a refund or must pay the federal government as a result of an overpayment or underpayment of your federal taxes for the year. While there are many deductions, credits, and other sources of income that can impact your return, for most individuals their annual salary is the largest determining factor. As such, having proper federal withholdings applied each pay period can eliminate much of the unknown.

Below we will discuss and summarize the different Steps of the W-4:

Step 1:

Enter your personal information — in step 1 (c) you will enter the filing status that matches your filing status on your 1040.

Step 2:

This step is only applicable for an individual that has more than one job or those that file as “Married Filing Jointly” and each spouse is employed. If neither of these is apply, this step can be skipped. If Step 2 is applicable then you will follow the instructions for only one of the options listed under (a), (b), or (c).

If you and your spouse each have only one job and your salaries are roughly the same, you can check the box at 2(c) — this box should be checked on each spouse’s W-4.

If one spouse earns a salary that is more than double the other’s salary, then you should consider completing the “Multiple Jobs Worksheet” on page 3 of the W-4 and follow the instructions based on the tables provided.

Step 3:

This step is only applicable to those that will claim dependents and have an income of $200,000 or less for Single filers, and $400,000 or less for Married Filing Jointly filers.

Step 4:

This step captures any other potential adjustments such as income from other jobs, or deductions such as student loan interest and deductible IRA contributions. To assist you in completing Step 4(b) there is a “Deductions Worksheet” on page 3. While most individuals apply the standard deduction, this section helps refine your withholdings for those additional circumstances.

Step 5:

Don’t forget to sign and date your form.

As most individuals would like to avoid a large tax bill, we recommend revisiting your W-4 annually, and at a minimum, after a significant life event (marriage or birth of a child) to avoid any potential surprise when filing your tax return. If you are often presented with a large tax bill each year, reexamining this form may help you avoid that inconvenience.

In addition to the instructions included on the form, there are many sources available to assist with any questions you may have as well as reaching out to your tax professional or financial advisor.