Adulting 101: A Millennial’s Guide to Filling out Form W-4

I hear many clients in their 20’s and 30’s ask, “How do I fill out the IRS Form W-4?” Many folks don’t understand what this form is, or why they have to fill it out.  If you’ve recently started your first job, switched jobs, gotten married or had a child, you may need to complete a new W-4.  Don’t wait to make these changes- planning now will help later!

The Goal of Form W-4

Form W-4 is the form employees complete to tell their employers how much federal taxes should be withheld from their wages.  It’s not just coincidence that when most people file their tax returns they get a small refund.  If your tax return is rather basic and you properly fill out the Form W-4 this will tell your employer how much to withhold from your paycheck.  If you find out during tax time that you owe a large sum of money or you have a large refund coming, it may be time for you to adjust your Form W-4 with your employer.  The goal of completing the Form W-4 properly is to either have a small refund or tax liability.  Ideally you would like to get your withholding for the year to match up exactly with your tax liability when you file your tax return.  Why let Uncle Sam keep more of your earnings than necessary or be required to write a large check in April?

Figuring out Your Allowances

The Form W-4 “Personal Allowances Worksheet” section will help you figure out how many allowances you are claiming in order to determine how much you should have withheld from your wages.  Use the steps below as a guide:

  • Read each question A thru G and determine the numbers you should write down at the right side of the page based on your personal situation. Read each line and answer independently of any of the other lines.
  • Line H is the total of all of these numbers and will transfer to line 5 of the Form W-4 at the bottom of the page. Fill out the Form W-4 at the bottom with all of your information checking whether you are single, married, or married but would rather withhold at the higher single withholding rate.
  • Input your total from line H above on line 5.
  • If you have been owing tax on your tax returns in the past or would like to have additional federal tax withheld from your wage then put any additional amount per paycheck in box 6.
  • Don’t write “Exempt” in line 7 unless you are absolutely positive you won’t be owing any federal tax for the year in question. I’ve seen folks who write exempt on this line and don’t realize it until they get their Form W-2 at the end of the year that they had no federal tax withheld during the year. It is never a pleasant finding when you go to file your tax return and owe a large lump sum amount that would have been taken out of your paycheck periodically during the year.
  • Sign and date the form and give it to your employer.

Not sure about your allowances? Some suggested situations are below.  Choose which one fits you or fill out the “Personal Allowance Worksheet” to be sure.

Dependent of another, Single, 1 Job and no children?
  – Mark Single and 1 Allowance

Not a dependent, Single, 1 job and no children?
  – Mark Single and 2 Allowances

Married, 1 job, spouse works, and no children?
  – Mark Married and 2 Allowances

Married, 1 job, spouse doesn’t work and no children?
  – Mark Married and 3 Allowances

If you have children or claim itemized deductions, those situations will affect how many allowances you should mark down on Form W-4.  Please use the “Personal Allowance Worksheet” to calculate your allowances if you have these situations.  Note that the allowance calculations above may lead you to having too little tax withheld under certain circumstances.

Common W-4 Myths

I’d like to dispel some rumors about this form that I hear from people I speak with throughout the year.  First, whatever allowances you make on the W-4 don’t affect how you fill out your tax return.  People say to me, “I know someone who claims 11 exemptions!” I have to explain they may claim 11 allowances, but on their tax return they may claim exemptions for themselves, their spouse, and maybe a few children.  It more than likely means that they just aren’t having a lot of federal tax withheld from their wages.

Second, the amount of withholding from your check is not the amount of Federal tax the government is permanently taking and keeping.  The amount of withholding is the amount you pay in through the year (supposedly ratably) based on your current earnings. When you file your tax return, the reconciliation of how much you will owe or will be refunded happens.

Lastly, having a large tax refund is not necessarily a good thing.  You are giving the government a free loan for a good part of a year and they won’t pay interest to you on that amount.  Wouldn’t it be better for you to have any extra money throughout the year to help with your bills, emergency savings, paying down loans or funding your retirement?  Increase your allowances so you won’t have a large refund at the end of the year and have access to those funds now rather than in the following year.

The W-4 can be confusing. If you have any questions about which allowances to make, contact an Anders advisor.