The 6 Most Common Questions About Your W-4
Read Time: 8 Minutes
Form W-4 has probably caused more frustration than traffic jams, TSA and Ikea furniture combined.
This deceivingly simple, yet remarkably complex piece of paper is probably better known as “that form you fill out when you get a new job, and then never think about again.” It’s no wonder so many people fill it out incorrectly.
That’s why today, we are tackling the 6 most common questions I hear about Form W-4. Questions like:
- When is the best time of year to submit a W-4?
- How do I know if I need to adjust my W-4?
- Why is the W-4 so tricky?
All these and more. This article will help you better understand your W-4, so you will no longer be intimidated by it, and can fill it out correctly. Let’s get to it.
1. What is the W-4?
Per IRS Publication 505, “the federal income tax is a pay-as-you-go tax.” This means that instead of making 1 lump sum tax payment on April 15th, you are required to pay your taxes little by little throughout the year.
For those of us who are employees, the most common way to do this is getting a portion of our regular paychecks deducted for taxes, and then having our employer send that amount to the IRS on our behalf.
This is called “tax withholding.” But don’t get mad at your employer. They are simply doing what the law requires of them. IRS Publication 15 states that “as their employer, you have the added responsibility of withholding taxes from [employee] paychecks.”
So your employer must withhold taxes, but how do they know how much to withhold? After all, everybody’s tax situation is very unique depending on their income, marital status, deductions, and more. That’s where your W-4 comes in.
IRS Form W-4 is a document you give to your employer so they know how much to deduct in taxes. In fact, if you don’t provide this form to your employer, they are required to withhold taxes at the highest allowable rate. That means less take-home pay for you, and is why filling it out properly is so important.
2. How does the W-4 work?
Form W-4 has multiple sections called “worksheets.” These worksheets ask you various questions about your life, in order to get a better understanding of your personal situation. Questions about your marital status, children, deductions, and more.
With this information, it’s possible to estimate how much you will owe in taxes for the entire year. Your employer can then deduct that money evenly, a little from each paycheck, to total up to the correct approximate annual amount.
For example, let’s say based off the inputs on your W-4, we estimate you will owe $10,000 in federal income taxes for the year. Let’s also say you get paid 2x per month, so 24x per year. That means you should have approximately $417 deducted from each paycheck ($10,000 / 24).
Obviously the goal is to get as close as possible to the total so you don’t have a big surprise come April 15th when you file your taxes. But, as we’ll see in the next section, that is much easier said than done.
3. Why is the W-4 so tricky?
Unfortunately, the W-4 is far from perfect. There are a few reasons for this.
- Balances Accuracy with Simplicity: The best way to accurately estimate your taxes is really to do a “mock” tax return in January for the upcoming year. Unless you’re a huge nerd (like me), the thought of doing your taxes 2x per year probably makes you nauseous. The IRS knows there is no way in hell the average American will do their taxes twice, so they have to compromise. The result is the W-4, which is significantly less complicated and time-consuming that an entire tax return, but as a result, is less accurate.
- Assumes Your Can Predict the Future: Another key assumption is that you actually know the amount of income and deductions you will have for the year. Clearly this is easier said than done. Even a good forecast will be, at best, only an educated guess.
- Assumes Nothing Changes: And even if you could predict the future, what if it changes? Life happens. You get a raise, switch jobs, get married. All of these can affect your taxes. And unless you update your W-4 almost immediately after a major life event, your withholdings are likely to be off. And we all know that updating your tax forms is the 1st thing you’re thinking of while on your honeymoon in the Caribbean, right?
- Ignores Key Pieces: Because it is so simplified, there are actually sections of the tax code the W-4 flat out ignores. The biggest example is the Alternative Minimum Tax (AMT). If 1 or more of these omitted sections applies to you, guess what? Your withholdings could be off.
Long story short, the W-4 has its shortcomings. Maybe in another post I’ll share the detailed process of how I actually estimate my taxes. But for now, just being aware of these shortcomings may help you identify if 1 applies to you, so you can plan ahead.
4. Should I adjust my W-4?
Without knowing anything about you, I’m willing to bet the answer is “Yes. Yes you should adjust your W-4.”
How do I know this? Because according to the IRS itself, almost 75% of Americans receive a tax refund. That’s over 100 million refunds. Not only that, but the average refund is $2,782! That means the majority of people had nearly $2,800 more withheld from their paychecks than they should have. And one of the easiest ways to fix this is by adjusting your W-4.
If you consistently owe a lot in taxes or receive a large refund when you file, you should probably adjust your W-4. Also, if you have a major life event such as a job change, marriage/divorce, home purchase, new child, etc., that can be another reason to make an adjustment.
5. When is the best time to fill out a new W-4?
Okay, so you may need to adjust your W-4, but when is the best time to do that?
In general, the beginning of the year is the best time. The IRS agrees, stating here that “the earlier in the year you check your withholding, the easier it is to get the right amount of tax withheld.”
This is because you pay taxes all throughout the year. So if your W-4 is incorrect, and you wait until November to fix it, you’ve already been withholding the incorrect amount of taxes for 10 months! Fixing it for the last 2 months won’t do much for you.
To be clear, it will make sure that you start next year off on the right foot, so I’m not saying you shouldn’t fix it. But it would have been better for you to catch it earlier.
There is a way around this, and that’s to overcompensate. For example, let’s say your W-4 was incorrect for most of the year, and you were having significantly too few taxes withheld from your paycheck. That means that you will likely owe a large amount of money come April 15th. You can change your W-4 and overcompensate by having a really large amount of taxes withheld from your remaining paychecks for the year.
Keep in mind though that, if you do this, you will have to adjust your W-4 again come January of next year. Since you were overcompensating, next year you’ll be withholding way too much if you don’t adjust it back down to normal.
6. How do I submit a new W-4?
Luckily, it is extremely easy to submit a new W-4 to your employer. You can download the form here, for free directly from the IRS website. Then simply fill it out and give it to your employer, most likely your Payroll/HR Department.
The form itself is 2 pages, but you only submit the bottom of page 1. So once you’re done, just cut that section off and hand it in. Below is exactly what the section you must submit looks like. Note it even says across the top “Separate here and give Form W-4 to your employer. Keep the top part for your records.”
Many companies allow you to actually submit a new W-4 completely online, without even needing to print the form. This will most likely be done through your payroll login, so if you don’t know that, again ask your Payroll/HR Department.
Wrapping It All Up
Getting your tax withholdings correct for the year isn’t easy. It requires predicting the future and is a little bit like hitting a moving target.
With these 6 common questions answered, hopefully you have a much better understanding of the Form W-4. After knowing the “what, when, why and how”, you can fill it out correctly for your situation, and take control of your tax withholdings. Because remember, you have much more control of your taxes than you think.
The conclusions drawn throughout this website are not advice meeting the particular investment needs of any investor, and they are not intended to serve as the basis for financial planning, tax, or investment decisions. This website is for informational purposes only and is not a solicitation or an offer to buy any product, service, security or instrument. The opinions expressed throughout this website are my own and not those of any company I work for.