A guide to Form W-4

The W-4 tells your employer how much federal income tax to withhold from each of your paychecks

Derek Silva

Derek Silva

Published December 23, 2019

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KEY TAKEAWAYS

  • Update your W-4 when your financial or personal situation changes, like if you get married or get a second job

  • You can update your W-4 whenever you want and as many times as you want

  • It’s easier to fill out if you have earnings documents for the current tax year, or last year’s tax return on hand

The purpose of IRS Form W-4 is to tell your employer how much money to withhold from each of your paychecks.

The Internal Revenue Service (IRS) collects your federal income tax from your pay throughout the year, instead of collecting it all when you file your taxes. If you overpay during the year, you will get a refund when you file your tax return. If you don’t pay enough throughout the year, you will owe a bill come tax season.

By filling out your W-4 properly and by updating it regularly, you can also maximize your take-home pay, so that you don’t have a big refund or a bill in April. How you fill out the form will differ from past years, though. The W-4 is redesigned for 2020 in order to incorporate changes from the 2017 tax reform (Tax Cuts and Jobs Act).

In this article:

What is Form W-4?

Employers remove a certain amount of money from each of your paychecks and send it to the IRS in order to pay your federal income taxes throughout the year. The amount they remove is called tax withholding, or simply withholding, and your W-4 tells your employer how much they should withhold.

The IRS requires every employee to fill out a W-4 form, and your employer probably had you complete it your first day on the job.

It’s important to get your W-4 right because you can avoid a big refund or bill when you file your tax return. If you’re overpaying throughout the year, your take-home pay will be lower and even though you get it back as a tax refund, the amount by which you overpay is basically an interest-free loan for the government. Changing your withholding and paying less taxes may allow you to receive a bigger paycheck throughout the year. On the other hand, you will pay a fee if you underpay your tax bill during the year by $1,000 or more.

How the 2020 W-4 is different from 2019

The 2020 W-4 form is different from previous years, because it now reflects the changes from the 2017 tax reform. In particular, it got rid of allowances. Previously, the amount withheld was determined by the number of allowances you took. If you wanted to make your withholding more precise, you would write in a dollar amount to withhold.

Now, instead of using allowances, the W-4 form simply bases your tax withholding on your estimated earnings, including any non-wage income, such as from a side hustle. You can make filling out the new form easier by having last year’s tax return to reference.

When to update your W-4

Changes to your income tax withholding are necessary when your personal or financial situation changes. If you don’t make changes, you could end up overpaying your taxes and having smaller paychecks throughout the year, or you could end up underpaying and owing money come tax season.

For example, let’s say you get married partway through the year and plan to file your next tax return jointly. The income tax brackets are different whether you’re a joint filer or a single filer, which means the amount you need to pay in tax will increase or decrease after your marriage, depending on how much your spouse makes.

Common situations that may require updating your W-4 include

  • Marriage or divorce
  • The birth or adoption of a child
  • You get a second job, change jobs, or get a raise
  • Your spouse gets a second job, a new job, or a raise (if you file a joint return)
  • You or your spouse is unemployed for any amount of time
  • You experience any other big change of income

You can update your W-4 at any time, and also as many times as you want. Just keep in mind that changes may take up to 30 days to take effect. Many employers and HR services allow you to change the W-4 digitally, but your employer may require you to fill out a paper form.

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The 2020 W-4 step by step

The 2020 W-4 has five sections, labelled as steps. Each step asks you about different types of income or tax deductions, so that you can determine how much your employer should withhold for each item. Not everyone has to fill out every part of the W-4.

You can avoid having to go through the form by hand if you use the IRS withholding estimator app.

Step 1 is just your personal information, including your Social Security number and your filing status.

Step 2 is only necessary if you have multiple jobs at the same time or if you file a joint return with a spouse who also works. You will need to fill out the worksheet in the W-4 instructions (page 3) because what you enter for this step depends on how many jobs you have and how much you make. You can use last year’s tax return to help you estimate.

Step 3 is only necessary if you have dependents. Also, only fill it out if you’re a single filer with an income of $200,000 or less, or if you’re a joint filer with an income of $400,000 or less.

To determine how much your employer should withhold due to the number of dependents you have, multiply each child under 17 by $2,000 and each other dependent by $500. The sum goes on the final line for Step 3. So if you have one child under 17 and a dependent parent, you would write $2,500 on Line 3.

Step 4 is where you enter additional income and tax deductions. Many people will not need to fill out this step. This section is also broken into three parts.

Fill out Step 4a if you earn money that won’t have income tax withheld. That mostly means income you earn outside of your regular job, like from a side job. This line includes income that would be reported on a 1099 form. Keep in mind that if you have $1,000 or more from income that doesn’t have tax withholding, you will need to file estimated taxes. If you expect your income will be roughly the same this year as last year, you can estimate this income using last year’s tax return.

Step 4b applies to people who itemize deductions instead of taking the standard deduction. There is a worksheet in the Form W-4 instructions (page 3), which you should use to determine what number to enter for Step 4b.

Step 4c is where you enter any additional withholding you want your employer to make from each of your paychecks.

Step 5 is where you date and sign the form when you’re done. You can then submit it to your employer. Your employer will also sign it before submitting it to the IRS.

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