Required each time you start a job, the W-4 form and worksheet are used to determine the amount your employer should withhold from your paycheck for federal income taxes. This brief video from our Personal Finance 101 Conversations series explains the basics of taxes, dependents, and exemptions.
Below is a full transcript of this video. It has not been edited or reviewed for accuracy or readability.
When you start a job, you quickly learn that there are plenty of forms to fill out. Whether you take a summer job or finish college and start your career, you’ll have to complete an Employee’s Withholding Allowance Certificate, or W-4. You have to fill one out each time you start a job and make changes when needed.
Your employer uses the information on the W-4 form to determine the correct amount to deduct from your paycheck for federal income taxes. The W-4 includes instructions and personal worksheets. The goal is to determine the correct number of allowances for you so your employer withholds enough to cover your taxes, but not so much that the government owes you a large refund at the end of the year.
The more allowances you claim, the smaller the amount withheld for taxes. Having too much withheld from your paycheck means the government is holding your money. Some people like that because it's like a forced savings plan, but the government does not pay you interest. On the other hand, withholding too little may mean you owe the government taxes at the end of the year.
For young, single people completing the W-4 is relatively easy. Let’s look at an example of a 17 year old boy, Sean, who just got a summer job at a beach resort. Let’s say he lives with his parents who claim him as a dependent on their taxes.
Let’s use this Personal Allowances worksheet to help Sean figure out how to complete the W-4. On line A, Sean could enter 1, but would probably enter 0. Here’s why; Sean is 17 and we said his parents claim him as a "dependent" on their taxes. Since Sean won’t have any other allowances, claiming 0 almost assures he will have enough withheld to pay his taxes. This is generally the case as long as a Sean is in school or while his parents are claiming him.
A dependent can be anyone who relies on you financially. For example, an elderly parent might live and depend on his or her children. Remember, the more allowances, the less money withheld from each check. That sounds great—more money in your hand. However, if you don’t have the correct amount withheld you might owe taxes at the end of the year.
Because Sean is single, he would enter 0 on line B, as well as lines C and D. This is because he is not married, lives at home, and his parents claim him as a dependent; so he does not qualify as "head of household." Sean has no children so he should put a 0 in line E. He doesn’t have dependents and will mark a 0 on line F as well. He has no other credits, so he should mark a 0 on line G, also. Now Sean adds up his allowances and puts the sum on line H. In this case, the sum is 0 allowances. As his life and circumstances change over the years Sean’s choices on the W-4 form will likely change too.
Now Sean is ready to complete the W-4 form. Sean should fill in his name, address, and Social Security number in boxes 1 through 4, and then enter 0 on line 5. The 0 comes from line H in the Personal Allowances Worksheet.
If Sean did additional work, like fee-based consulting, or had a second job requiring extra withholdings to cover the taxes for those wages, he could write an additional amount of money to have withheld from each paycheck on line 6.
Some people are exempt from withholding. Line 7 shows the two requirements you must meet in order to qualify as exempt. An exemption has to be updated annually. If it turns out you earn more than you expected you may be in for a surprise when tax time comes. The following flow chart from IRS Publication 505 Tax Withholding and Estimated Tax can help you determine your exempt status. In Sean’s case, he would most likely earn more than $1050.00 at his job and would not be exempt from withholding.
When you’re done, you sign and date the form and your employer will finish fill out boxes 8-10.
In addition to being required by law, completing the W-4 form helps you be financially prepared to pay your taxes at the end of the year. The personal exemption worksheet will help you decide the withholding amount that’s best for your situation, finding the job is up to you.