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W-4 - Personal Finance 101 Conversations, Episode 22

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.

Transcript

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 there are plenty of forms to fill out. Whether you take a summer job, go to work full time after high school, or finish college and start a career, you’ll have to complete an Employee’s Withholding Certificate, or Form 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 to determine the correct amount to deduct from your paycheck for federal income taxes. The W-4 includes instructions, personal worksheets, and an online Tax Withholding Estimator https://www.irs.gov/individuals/tax-withholding-estimator.

The goal is for your employer to withhold enough from your check to cover your taxes, but not so much that the government owes you a large refund at the end of the year.

Some people are exempt from withholding. Generally speaking, people qualify for exemption if they had no federal tax liability in the previous year and don’t anticipate having federal tax liability in the current year.

If you claim exempt status and it turns out you earn more than you expected, however, you might be in for a surprise at tax time. It’s important to be accurate when filling out your W-4.

The W4 has 5 steps. We’ll go through each step briefly, then show an example of a young person completing his first W4.

Step 1 is broken down into Parts a, b, and c. Part (a) asks for your name and address. Part (b) is your social security number, and in part (c), you’ll select one of three boxes:

Single or Married filing separately;

Married filing jointly (or Qualifying widow or widower); or,

Head of household

To select head of household, the form states, “Check only if you’re unmarried and pay more than half the costs of keeping up a home for yourself and a qualifying individual.”

The government has requirements about who counts as a qualifying individual. One example would be your own child.

Moving on to steps 2 through 4, you’ll read, “Complete Steps 2–4 ONLY if they apply to you; otherwise, skip to Step 5. See page 2 for more information on each step, who can claim exemption from withholding, when to use the online estimator, and privacy.”

We’ll go over each step, but again, many people will be able to skip these:

You’ll complete step 2 if you work multiple jobs or you spouse works. If you meet those criteria, you’ll choose one of three options under the step to ensure the correct amount of withholding.

In step 3, you’re asked to claim dependents. Dependents are qualifying children or others who depend upon you financially.

Step 4, Other Adjustments, is an optional step where you can request additional taxes be withheld from your check.

As you get older, your tax situation will likely change, but 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 resort. Let’s say he lives with his parents who claim him as a dependent on their taxes. Sean would not claim exemption because he didn’t file a tax return last year and doesn’t know how much he’ll earn at his job. He would not want to find out after the fact that he isn’t eligible owe taxes and or penalties.

Sean would complete Step 1 and mark the box “Single or Married filing separately.”

Steps 2, 3, and 4 would not apply to Sean so he would skip to step 5. Here’s why: Sean only has one job, and is not married so he can skip step 2. He doesn’t have qualifying children or any other dependents, so he can also skip section 3. And he doesn’t want to have additional taxes withheld from his income so he skips section 4 as well.

Step 5 requires Sean’s signature and date, and with that, Sean’s done. His employer would complete the rest. Wasn’t that easy?

In addition to being required by law, the W-4 helps you be financially prepared to pay your taxes at the end of the year. Following the instructions, using the estimator and worksheets when appropriate will help you decide the withholding amount that’s best for your situation, finding the job is up to you.

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Audience:   High School, Middle School, College, Consumers
Language:   English
Subjects:   Personal Finance, Career and Technical Education
Resource Types:   Video, Multimedia
Concepts:   Taxes