Guide to Filling Out the W4
Were you happy with how your tax return turned out this year? If you weren’t, read on to find out how to adjust your income tax withholding so that next year can be better!
First, you need to know that there are two ways to pay your federal income tax.
Estimated tax payments
Withholding via payroll that shows up on your W2 at year-end
Estimated tax payments are a topic for another time, but today, I want to talk about how to complete the W4 to your best advantage while still fulfilling your financial obligations to the IRS.
In a recent Wednesdays with Wendy video, I walked viewers through completing their W4. If you are an S Corp owner on W2 payroll, have a W2 job in addition to your business, or if you are married and your spouse has a W2 job, this guide will give you some tips on filling out the W4 for that job.
What is the W4?
The W4 is for employees of a company, and the form tells the company’s payroll processor how much to withhold from your paycheck each pay period for federal tax purposes. Your state may have a separate form for state taxes, but today I’m focusing on the federal withholding form.
If you’ve completed one of these in the last few years, you may have noticed that the form changed in 2020. In some ways, this made completing the form easier to understand, and in other ways, it made the process more complicated!
Following the Steps
The W4 form is separated into steps. Technically, the only sections that MUST be completed for the payroll processor to withhold funds from your paycheck are Steps 1 and 5. Step 1 is your name, address, Social Security number, and filing status. Step 5 is for your signature and the date.
Steps 2-4 are where you might need some help. Let’s look at each of these individually.
Step 2 is where you will need to be aware of your household’s entire income. The situation I see most often is where you don’t account for multiple jobs in your household. If you fill out the W4 as if there is only one job, you risk having too little tax withheld. It is worth the time to follow the “Multiple Jobs Worksheet” on page 3. Thankfully, the form walks you through the calculation step by step.
Step 3 is for dependents and other credits. If you have children under age 17 living with you or other dependents, follow the directions to know how much to enter into those spaces on the form.
Step 4 says it is optional, but it is actually very important. If you have any other income that is not from a work situation, such as dividends or investment income, or if you are an S Corp owner and want to cover some of your self-employment tax through withholding, pay special attention to question C in Step 4. To get the most accurate amount for this line, you will want to use the IRS tax calculator. This is the line where you can have more withheld than the payroll software will calculate, and will help you avoid having too little tax withheld and owing more next April.
Confused by your W4? Or, perhaps you are realizing that what I’ve described here is noticeably different from the W4 you completed before 2020. It’s wise to seek help from your tax preparer to know what figures to put on your form to set you and your family up for the best tax situation possible.
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