When you begin a new job, your employer asks you to complete Form W-4, known as the Employee's Withholding Allowance Certificate. What you may not know about this form could drastically affect the tax you owe or the refund you receive when you file your tax return next year.
Note that you can change your W-4 at any time for any reason. Just ask your Payroll Department for assistance.
The only purpose of a W-4 is to let your employer know how much money to withhold from your paycheck for federal taxes. The filing status you choose, and the number of exemptions, DOES NOT need to match your tax return. In fact, the IRS never sees this form. What you enter on your W-4 is between you and your employer. Period.
Be aware that how you complete your W-4 can either make sure you don't have a big balance due at tax time, or it can put more money in your pocket during the year. Which is more important to you? That's the question you need to answer before you fill out a W-4.
How do you know which is best?
First, if you got a big refund last year (more than $500), how do you feel about loaning your money to Uncle Sam at 0% interest? Would you rather have that money every paycheck? If you're worried that you might owe taxes next year, put the extra money in your own savings account and earn interest that you can keep.
To withhold less money from your paycheck, you can change your filing status from Single to Married, or from Married to Head of Household. Or you can add "allowances," basically claiming additional dependents.
On the other hand, if you owed money on your tax return and you didn't have a one-time windfall during the year, maybe you need to withhold more each paycheck. Failure to pay enough taxes can result in a penalty, so you want to be sure you pay enough. But not too much.
If you need to pay more each pay period, change your filing status from Married to Single, or reduce the number of allowances you claim. If that isn't possible, you can also have a fixed amount deducted from each check.
TurboTax can help you decide how you should complete your W-4. There is one calculator inside the TurboTax program (search for "w-4" after you file your tax return). And you can also use the W-4 Withholding Calculator, an online service from TurboTax that's available all year.
Remember, the information on your W-4 is not the same as what you report on your tax return. But how you complete this form can either put more money in your pocket...or loan it to Uncle Sam. You decide.
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