When you start a new job, one of the first things you will do is fill out a form W-4 and give it to your employer. If you do not give your employer a completed form W-4, your employer has to withhold at the highest rate, as if you were single and claimed no withholding allowances. This is rarely the result that you want.
If you are an employee, your employer withholds income tax from your pay. Your pay includes not only your regular pay but other compensation such as bonuses, commissions, and vacation pay. The amount of income tax your employer withholds from your regular pay depends on the amount you earn and other information you give your employer on federal form W-4.
If your income is low enough that you will not have to pay income tax for the year, you may be exempt from withholding – but only for one year. You’ll have to fill out a new form W-4 by February 15 each year to renew the exemption. Keep in mind that this exemption applies only to income tax, not to Social Security, Medicare, or other tax withholding.
If you are not exempt, your employer will figure your withholding based on allowances you claim on the form W-4. As rule, the fewer allowances you claim, the more withholding. The more allowances you claim, the less withholding. It’s important to get this right because if you have too little tax withheld, you will owe at the end of the year and may be subject to an underpayment penalty.
During the year, your life might change in ways that affect your withholding. You could get married, divorced, have a child, get an additional job and so on. Any of those changes may affect the exemptions, adjustments, deductions, or credits you expect to claim on your tax return. If you have any big changes like these, you may need to give your employer a new form W-4 to change your withholding status or your number of allowances. Generally, you can submit a new form W-4 at any time to change the number of your withholding allowances for any other reason.
Once you’ve figured out your allowances, you may want your employer to withhold even more. It’s not unusual to ask your employer to withhold more income tax in order to accommodate noncash wages and other wages not subject to withholding.
If you have income from more than one job at the same time, you’ll want to be careful about reporting your allowances. Each of your employers will require you to submit a form W-4. It may be advantageous to split your allowances between forms W-4 for each job. You can claim all your allowances with one employer and none with the others or divide them up.
If both you and your spouse are employed and expect to file a joint return, remember to consider your combined income, adjustments, deductions, exemptions, and credits. As with multiple jobs, you can divide your total allowances any way that you want, but you cannot claim an allowance that your spouse also claims. If you and your spouse expect to file separate returns, you’ll figure your allowances separately.
If you have questions about withholdings, please contact us for more information.