How to Fill Out a W-4
When it comes to money, people will do just about anything to get their hands on some. When it comes to taxes, people will do anything to evade them. For once, my business sense is going to come and save the day for those of you who might be a bit confused when it comes to your favorite tax schedule - the W-4.
I had meant to write this a long time ago, but held off on it in lieu of other "more important" articles at the time. Now we're closing in on the end of 2005, and for those of you who actually are concerned about taxes, those W-2s will be coming in after January 1st. Now let's start with the basics. Withholding is the act of deducting from an employee's salary. Bad, yes. What determines the amount that is withheld from your paycheck each pay period is the W-4. Another common term is allowances, which is a deduction from your total income making that specific part of the income tax-free regardless of your spending habits. In English, these deductions allow you to take more money from your paycheck each period by lowering the amount of money you give the government.
Now I know what you're thinking, don't pay the government anything, and then you'll get your full paycheck (minus social security, etc.), right? Wrong. Let's talk about refunds. If you've avoided filling out a W-4 altogether, or you didn't declare any allowances, chances are that you overpaid your taxes and come tax-time, you get a refund. However, if you don't give the government anything and say, you make about $50,000 that year, well, you owe the government a good $10,000 or so (rough math, don't kill me). The purpose of this article is to not only teach you how to fill out the W-4 and fill it right (using the IRS' own tools), but if you're one of those people who like receive as much as you can each period and don't mind a small refund; you'll get some benefit out of this as well.
Step 1: Download your own W-4 (Sorry, only for US.)
So, have it open? Take that top portion above the dotted line and ignore it, if you printed the form, take the top portion and throw it away. Don't get confused by that worksheet, it is one of the vaguest pieces of shit the IRS has ever come out with. But, they're not all bad, we'll be using their own tool to decide your fate.
Step 2: Open this link (http://www.irs.gov/individuals/article/0,,id=96196,00.html) in a new window.
The purpose of this application is to help employees to ensure that they do not have too much or too little income tax withheld from their pay. It is not a replacement for Form W-4, but most people will find it more accurate and easier to use than the worksheets that accompany Form W-4. You may use the results of this program to help you complete a new Form W-4, which you will submit to your employer.
See? Even they admit the worksheet sucks. Now let's dive in, click continue.
The first thing you'll see is "filing status" which can be pretty confusing. Let me try and clear it up for you. If you're single, you're single. However, if you're single and provide for somebody (which means paying for more than 50% of their expenses), then you're a "head of household." If you're married, check with your partner to see if your situation allows you to file as one or on two separate returns. As a student, I would recommend to file jointly, unless one or either partner holds some serious assets that were acquired before the marriage. So... if you're rich. If you're still young and you can be claimed by your parents or some other guardian, then click "single" and click "yes" for the question below it. Then continue.
Unless you've gotten in some trouble of the cheating sort, or you've had troubles of the "getting a girl I don't know pregnant" sort, then read this next page on your own. If you're over 65 and you're reading this blog, I applaud you. But for the 99.99% of you who fit neither, skip this page.
Yes, the nitty gritty. Time to do a little math to expose the goods. Pull out that pay stub and find out your yearly salary. For those who are paid through wages, take your hourly wage, multiply it by 40 (or 20 if you're part-time), then multiply it by 52 to get your yearly earnings. If you contribute to a 401(k) through your employer (you'll know if you do), then fill out your contribution in the 2nd box on this page. For the 3rd box, freelancers get ready, declare any income you expect to get from freelancing. You don't have to... I don't think. Just beware if you don't fill it out and all of a sudden forget to pay taxes on that $32,000 gig you get from Cingular. Finally, if you're a pimp with stocks, fill out the dividends you expect to earn in the final box. Click continue when you're done.
Again, time to skip this page. Unless you actually know how to itemize your deductions, and god bless you if you do, then do so now. Otherwise, skip the page if you want to keep your sanity. Most likely the number they show you up top ($7,550 deduction for head of household) is good enough. Wait, you don't know what a deduction is? Well, say if you make $50,000 and you elect "head of household" as your filing status, that means you subtract $7,550 from $50,000 to arrive at your taxable income. For married couples, this is more like $9,000 and for single folks, it's more like $5,000. So click continue if I haven't completely lost you.
The Results
Ahhh, the results, finally. Now, what this page will tell you is if you will be withholding too little or too much from your wages. If you are withholding too little and do not want much of a return come April, then they tell you something like this:
Assuming these recommended allowance(s) are in effect for all of 2006, your expected refund should be about $175. Following this recommendation will ensure that the amount withheld from your wages will cover all of your projected tax liability while minimizing your refund.
Otherwise, they'll tell you how much extra you must withhold from your paycheck in order to prevent yourself from having to pay the IRS a gigantic sum of money come April. So, if you like the number, take that and fill it out on the appropriate section on the W-4. If you would rather get that nice spring refund, then put a 0 in the appropriate section. Then fill out the rest of the information and bring it to your employer and the changes should become effective within a few weeks. Make sure to do this every year and every time you change jobs. Also, remember to pro-rate your salary depending on when you fill out the form. So for example, if you make $50,000 a year but join the company in June, you would put in $25,000 - since that is the salary you expect for the rest of the year.
Hopefully that'll help somebody. Remember, I'm not tax professional, but I do think that by utilizing this tool, you can save yourself from some unneeded money worries at no expense. Really, why would you want the government to keep your money with no interest when you can either spend that money yourself or put it in an interest-bearing account? You decide.