W-4 Allowances: What You Need to Know
There’s no escaping the taxman.
When April rolls around, you have to pay your federal taxes, and that can become a problem if you don’t take the time to make arrangements in advance.
That’s where the W-4 form comes into play.
It allows you to set up your W-4 allowances which can help you cover your federal and state taxes and even provide you with a hefty return if you decide you want to go that route.
What Is a W-4 Form?
In essence, the W-4 form is used to inform your employer of how much money they should set aside from your paycheck for your federal income tax.
Using it, you can decide how much money you want to give by claiming allowances. The number of allowances on your W-4 that you claim will dictate how much taxes are taken out of your paycheck and sent to the IRS.
With the help of the form, you can ensure that you won’t get hit hard by the federal income tax in April since you've already paid most of your total tax bill.
Instead of having to pay your taxes as one lump sum during tax season, your employee pays them throughout the year on your behalf, allowing you to better plan your personal finances and ensure that you don’t have to pay a big sum all at once. Not only that, you're also complying with the IRS rules for paying your taxes during the year and avoiding payment penalties and interest.
What Are Allowances?
Figuring out what are allowances on W-4 may seem confusing, but when you break it down, it really doesn’t have to be.
W-4 form uses an allowance system to calculate how much is withheld.
When you’re filling out the form, you can select how many allowances you want to claim, and that will reduce the amount that is withheld from your paycheck.
How many allowances you can claim depends on your marital status, the number of jobs that you have, and a few other conditions. The safest (meaning the most amount of taxes are taken out of your pay) W-4 selection is choosing "Single" and "zero allowances
Now, you may be thinking – what should I claim on my W-4?
Well, the number of allowances on W-4 that you should claim depends on a few key factors, which we’ll explore below.
What Allowances Should You Claim on Your W-4?
Now that we understand what W-4 allowances are, we need to look into how to decide what to claim on W-4 forms depending on your situation.
Usually, the decision comes down to your own preferences and your tax exemptions. If you want to have more money upfront and don’t need a large tax return, you may be able to get away with claiming one or even two W-4 allowances on the form.
However, it’s a bit more complicated than just having money now vs. having them next year.
Many people decide to claim one or even two allowances on W-4 when they know that they have federal income tax deductions and credits that will reduce the sum that they’ll have to pay during tax season.
Now, that is not mandatory, and you may opt to take on a W-4 allowance even if you don’t have any exemptions, but then you are likely to have to pay taxes, and if the amount exceeds 10% of your total annual tax bill, you may likely also have to pay a penalty.
On the other hand, if you don’t claim allowances, you won’t lose that money – it will simply come back to you in the form of a tax return, which you can then use for anything you want, even a nice vacation, which is what I would do!
When the W-4 Form is Especially Important
Choosing the right way to approach your W-4 form is important, but you should also consider that the right decision for your circumstances may change every time you fill it out.
When starting out with a new employer, you will need to fill out the form either way, but it’s critical that you also remember to update your form whenever your financial situation and tax status changes, which is something that not all people remember to do.
Some of these situations include getting married or filing for divorce, making a big purchase such as a home, inheriting money, gaining or losing dependents, gaining significant capital, or retiring.
All of these and many other situations may impact your federal income tax and may require you to make changes to the number of allowances for W-4 that you claim.
You may choose to update your form at any time, but if you forget to do so when starting work, remember that your employer will automatically withhold the maximum amount from your account.
When figuring out how to best proceed with your W-4 form and other aspects of your taxes, you may not always know what’s the smart move in your situation. Luckily, you can always rely on professionals to help guide you through the process.
We offer comprehensive tax accountant services to our clients and can help you sort through your taxes and figure out the best way to move forward.
If you want to learn more, please give us a call at 954.961.1040 or drop an email to email@example.com to schedule a meeting and we’ll make sure you’re making the best choices for your future.