Follow the conversation between brothers as they complete a W-4 form in this episode of the Personal Finance 101 Chats. Click "Messages" to begin your session.
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Sean: Hey Bro, how’s life in the real world? Do you miss college yet?
Finn: Hmm, maybe… This grown-up gig is pretty cool, though. Only downside is having to actually get up and go to work – EVERY MORNING!
Sean: Haha, almost like you’re back in high school. Ugh. I can’t wait for summer break! Speaking of which…wait for it…I GOT THE JOB!
Finn: That’s awesome! I wish I’d gotten to work at a beach resort in high school. That’s like getting paid to go on vacation!
Sean: Yeah, I’m so stoked!
Sean: They emailed me a bunch of forms that I have to print and sign and send back. I actually have a question about one, if you’ve got a few minutes?
Finn: Well if I can’t be the lucky brother, I guess I’ll be the smart one. Whatcha got?
Sean: Well, it’s called a W-4 form, and it’s asking me about allowances? Does that make any sense to you?
Finn: Ha, yeah. It’s a form that everyone fills out when they start a new job. It tells your employer how much money to take out of each check to go toward your taxes.
Finn: Basically, the “allowances” worksheet helps them take out enough so that your taxes are all covered at the end of the year, but not so much that you get a ton of money back after your taxes are done. Want me to help you walk through it?
Sean: Uh. . .Yes!
Finn: Ok, check it out. If you go to this link, we’ll be looking at the same form and we can just walk through it line by line. Cool? http://www.irs.gov/pub/irs-pdf/fw4.pdf
Sean: Sweet. That’s exactly the same form that is giving me trouble!
Finn: Ok, so, on line A, you're actually going to enter 0, because you're only 17 and Mom can still claim you as a "dependent" on her taxes. This will be true for as long as you're in school and she's claiming you.
Sean: Ok, got it. Hey, why are these called "allowances"? Doesn't sound like they want to give me money every week, or anything.
Finn: Yeah, that word doesn't make much sense in this context. The basic thing to remember here is that the more allowances you claim, the LESS money they take out of each check, which means you might OWE taxes at the end of the year.
Finn: If you claim 0 or 1 allowances, they take more out of each check, which makes it more likely that you'll be getting money back from the government at the end of the year. Some people really like that, because it's like a forced savings plan.
Finn: Other people would rather their employer only take out the bare minimum because they could be investing that money or at least putting it in a savings account that pays interest. In any case, the worksheet will help you get it right.
Sean: Aaaaaahhhh, that makes sense. Why couldn't they just say that in the first place?
Finn: Meh, forms are tough!
Sean: Anyhow, on line B, since I'm obviously single and since I only have one job, I enter 1 on that line?
Finn: You got it.
Sean: And on lines C and D I can put 0 on both because I'm not married and don't have any kids?
Finn: Do you even NEED my help with this?!? Seems like you've got it.
Sean: Ok, just hang on and let me see. Since I don't think Mom would take too kindly to me calling myself the "head of household", I should also put a 0 in line E.
Sean: I don't have any children or other dependents, so I can put 0s in lines F and G!
Finn: Exactamundo. Now just add them up and put that number in H. If I'm counting right, that means you'll put a 1 in that line.
Sean: That's what it looks like to me. Ok, the bottom of the form is basic name and address stuff. I'll have to ask Mom what my Social Security number is, I know that she has my card in a file somewhere.
Finn: Yep. Right again. Heh, if only my job were this easy. I could just sit here and do this all day!
Sean: You *could* come join me as a lifeguard this summer!
Finn: Tempting, little brother...very tempting. Ok, back to the form. Basically, on line 5 on the bottom part, you're just going to put in the same number from line H above. That's still 1.
Sean: Line 6 is weird. Why would I want more money taken out of my check? That's lame!
Finn: No, not in certain circumstances... for example, if you have a second job or do freelance work, like me, you might have extra taken out to cover the taxes for those other wages.
Sean: Blah blah blah, that doesn't sound like it applies to me. Since I've never had a job before I can't write Exempt on line 7, right?
Finn: That one's a little tricky. Mom can claim you as a dependent, so if you expect to earn more than $950 this summer, you are not exempt.
Sean: So then I just sign it? What about these other boxes 8-10?
Sean: Heh, that was totally easy. I could have done it no problem.
Finn: Yep... maybe you're the lucky *and* smart one!
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