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by Kristin Wong, Contributing writer, Lifehacker.com, Original article found here
Maybe you started your first job or maybe you gave up the freelance lifefor full-time employment. Whatever your scenario, if you find yourself filling out a W-4 for the first time, you may be a touch confused by all the fields, worksheets, and forms. Yes, the IRS can make things confusing. Let’s take it one step at a time.
Step One: Decide If You’re Exempt (You’re Probably Not)
When you start a new job as an employee, your new employer will give you a W-4. Your W-4 is a two-page IRS form that basically tells your employer how much money to take out of your paychecks to cover taxes. One of the first instructions on your W-4 is what to fill out if you’re exempt. But you’re probably not exempt.
Exempt means you’re not on the hook for taxes, so your employer won’t take anything out of your paycheck for federal income tax throughout the year (they’ll still take out money for Medicare and Social Security, though). If you are exempt, you’ll simply write “Exempt” on Line 7 of your W-4.
Generally, you can only claim exempt if you earn less than $10,350 for the entire year. If someone can claim you as a dependent and your earned income is $6,300 or below, you can claim exempt, too.
You definitely don’t want to file exempt if you’re not actually exempt, though. Again, you won’t have any federal income tax withheld from your paycheck. So when you do your taxes in April, you’ll have a giant tax bill that includes late payment penalties.
Step Two: Fill Out the Worksheets
The bulk of your W-4 is worksheets. There are three of them:
- The Personal Allowances Worksheet (for everyone)
- The Deductions and Adjustments Worksheet (for people with a bunch of deductions)
- Two-Earners/Multiple Jobs Worksheet (for people with more than one job or married people who both work)
These worksheets give the IRS a general idea of your taxable income so they know much to withhold for taxes from every paycheck. If you don’t report a second income via the “Two-Earners” worksheet, for example, they might not withhold enough money throughout the year, which means you could end up owing the IRS money when you do your taxes in April.
Calculate Your Personal Allowances
The Personal Allowances worksheet is for everyone, and it’s straightforward. Your “personal allowances” basically represent your deductions. The more allowances you claim, the less money is withheld from your paycheck.
The worksheet guides you through how many you can claim, line-by-line. It’s pretty easy to figure out, but the IRS has a withholding calculator that can help you make sure you’re claiming the right amount of allowances, too. Roberg Tax Solutions suggests the following allowances, depending on your filing status:
You are a student, either in high school or in college. You’re not married and you don’t have kids. Your parents are allowed to claim you on their tax return (you’re under 24 years old.) SINGLE, ZERO ALLOWANCES
You’ve got a job, only one job, you’re living on your own, and you’re single.SINGLE, ONE ALLOWANCE
Now if you have a child, add another allowance for each child. For example, let’s say you’re single with 2 kids, you’d claim single 3 allowances; one allowance for you and one for each of the children.
You’re married and only one person works: MARRIED, TWO ALLOWANCES
You’re married and you both work—you’ll each have your own W-4 and they will be different. Spouse #1 with higher paying job—claim MARRIED and all the allowances for the family. Spouse #2 with the lower paying job—claim MARRIED BUT WITHHOLD AT HIGHER SINGLE RATE, ZERO ALLOWANCES
Once you have the total number you want to claim, you’ll enter that amount on Line H. It doesn’t have to be an exact science. You can claim more or fewer allowances if you like because, again, it’s just meant to get an idea of how much you should have taken out of your paycheck.
If you get a big tax refund every year, you might want to claim more allowances. A big tax refund generally means you’re overpaying your taxes throughout the year, so claiming more allowances can balance that out a bit. Your refund won’t be as big, but your paychecks will be bigger.
On the other hand, too many allowances and you might underpay your taxes. If you claim too many, you may not have enough tax withheld each pay period and you’ll end up owing money in April. It’s probably better to err on the side of overpaying and not claim too many personal allowances. You can always adjust this number later and turn in a new W-4, too.
From there, you have two more worksheets you may need to fill out: the Deductions and Adjustments Worksheet, and the Two-Earners/Multiple Jobs Worksheet.
Decide If You Need to Make Any Adjustments
This worksheet is for any tax deductions and credits that might lower your taxable income. This will give the IRS a more accurate idea of your tax liability so you don’t overpay throughout the year. In basic terms, if you take any major deductions or credits that lower your taxable income by a lot, you’ll want to fill out this form. If you itemize your deductions, you should definitely fill out the form. Many people just take the standard deduction because it’s easier, but Itemizing makes more sense if you have specific, large expenses you can deduct, like mortgage interest payments, charitable contributions, medical expenses, and so on. You might also have credits or other “income adjustments” for things like a IRA contributions, alimony expenses, or student loan interest.
The worksheet instructs you to visit Publication 505 to see all of the credits you might be eligible for, but the IRS has a handy withholding calculator that’ll walk you through the process. The calculator will tell you your total itemized deductions along with your adjustments to income, which makes it really easy to fill out this worksheet.
Fill out “Two-Earners” If Your Household Has More Than One Income
You’ll use this worksheet if you have two jobs or if you’re married and your spouse has a job, too. The goal of this worksheet is to calculate how much extra you should have withheld from your paycheck, based on the amount of that second income.
This worksheet is pretty easy to follow, though. First, if you filled out the “Deductions and Adjustments” worksheet, you’ll enter your total from that worksheet on Line 1 of this one. From there, use the two tables at the bottom of the worksheet to fill in Lines 2-9. Table 1 is for the lowest paying job and Table 2 is for the highest paying job. These tables help you find your allowances based on both your incomes.
Each line of the worksheet is just basic math to calculate the additional amount you’ll have withheld from each paycheck, and you’ll enter this amount on Line 9.
Step Three: Fill Out Your W-4
Once your worksheets are completed, it’s time to fill in the blanks of your actual W-4 Form. Lines 1-4 are pretty standard stuff: your name, address, social security number, and tax filing status. In Line 5, you’ll enter the number you calculated from Line H of your Personal Allowances Worksheet UNLESS you filled out the Deductions and Adjustments Worksheet, then you’ll enter the number you calculated from Line 10 of that.
And if you filled out the Two-Earners Worksheet, find the amount you calculated in Line 9 of that worksheet, then write that amount in Line 6 of your W-4.
From there, you’ll sign your worksheet and hand it over to your employer. And that’s it! You should have just the right amount withheld from your paycheck. You won’t owe a bunch of money in April but you won’t get a huge refund, either.
Whenever you run into any major life changes, you’ll want to update this form, too. Obviously, if you get a new job, you’ll fill out a new one, but if you get married, have a kid, or get a second job, you’ll ask for a new W-4, then adjust accordingly.