When you’re looking for ways to increase your cash flow, consider changing your tax withholding so you get more money in every paycheck. Although the IRS sets limits on how many allowances you can claim on your W-4 form, you can change your tax allowances to increase your take-home pay and benefit from your hard-earned money upfront instead of waiting for your tax return.
Here’s a closer look at how to fill out Form W-4 and what you need to know about understanding tax-withholding requirements so that you can decide how much money gets taken out of your paycheck.
Steps to Fill Out a W-4 Form
The first part of Form W-4 is a Personal Allowances Worksheet that can help you determine how many exemptions you can claim. You can fill out the worksheet but don’t need to submit it to your employer.
Here’s a quick guide to completing the worksheet and tips for filling out the W-4 form:
- Read each statement listed on lines A through G and enter a specified number as your answer. You can leave some of the statements blank if they don’t apply to you.
- Add up A through G to calculate your total number of allowances, and enter the number in Line H.
- Enter the number from Line H of the worksheet in Line 5 of Form W-4.
- Fill out actions 1 through 4 on Form W-4.
- Complete the Deductions and Adjustments Worksheet only if you plan to itemize tax deductions or claim certain credits on your income tax return. You won’t need to do this if you plan on claiming a standard deduction on your income tax return.
- Enter the total amount calculated in Line 10 on Line 5 of Form W-4.
- Decide if you want an additional amount withheld from your paycheck and enter it in Line 6.
- Write “Exempt” in Line 7 only if you agree to the certifying statements regarding meeting the conditions for exemption.
- Sign and date your form.
How Your W-4 Form Affects Net Pay
You receive a Form W-4, also known as an Employee’s Withholding Allowance Certificate, from human resources when you start a new job. You must complete this form so your employer withholds the correct amount of federal income tax from your paychecks. The IRS recommends completing a new W-4 form each year — and also at any time that your personal or financial situation changes due to a pay raise or other life event such as marriage or the birth of a child.
Your employer deducts your tax withholdings based on the number of allowances you report on your W-4 form, and each allowance reduces the amount withheld.
You might be able to claim an exemption from withholding if you meet both of the following criteria:
- You had no tax liability in the previous year so you had a right to a refund of all federal income tax withheld.
- You expect a refund of all federal income tax withheld because you expect to have no tax liability this year.
Allowances on Form W-4
You might wonder how many allowances to claim on your W-4 form and how this is different from exemptions you claim on Form 1040. Both the number of allowances and exemptions you claim reduce your federal income tax, but in different ways.
The maximum number of allowances you can claim depends on the number of exemptions you’re allowed to claim. You might be claiming a dependency exemption on your federal income tax return, which means you’ll be claiming at least one allowance for the number of dependents on your W-4 form — reference Line D on your Personal Allowances Worksheet.
Form W-4 FAQ
You might still need clarification on topics other than how to fill out a W-4. Here are answers to some frequently asked questions:
1. What’s the difference between a W-4 and a W-2?
A W-4 is the form you fill out upon employment so your employer withholds your desired amount of federal income tax from your paycheck. A W-2 is the IRS tax form you receive from your employer at the end of the tax year which includes information on: how much money you earned, how much money was withheld for federal and state taxes and other contributions including to Social Security and your employer-sponsored 401k account. You’ll use form W-2 when filing your taxes.
2. What should I do if I’m earning money from two jobs?
When you have income from two jobs, you need to complete only one Form W-4 worksheet, but you must split your allowances between the W-4 forms for each job. According to the IRS, your withholding will typically have the highest degree of accuracy when you claim all of your allowances on the W-4 form for the highest-paying job and claim zero allowances on the others. You can also choose to divide the allowances in any way you see fit. But you cannot claim the same allowances with more than one employer at a time.
3. Why is my employer taking taxes out of my paycheck if I didn’t give him a Form W-4?
When you don’t complete and submit an accurate Form W-4 to your employer, it will withhold taxes at the highest rate, which is the same rate you’d be paying if you were single and claimed zero allowances.
4. How do I know if my employer is withholding too much from my paycheck?
Once your W-4 Form takes effect, you can use the IRS withholding calculator on IRS.gov or reference Pub. 505 to see whether the amount being withheld is comparable to the projected total tax for the year.
5. Will the amount of money I earn from investments and dividends affect my W-4?
The IRS classifies investments and dividends as nonwage income. When you’re earning a significant amount of nonwage income, you can make estimated tax payments using Form 1040-ES to avoid owing additional tax when tax season rolls around.
Up Next: How to Read Your Pay Stub
Cynthia Measom contributed to the reporting for this article.