Whether someone is entering the workforce for the first time or changing jobs, filling out new hire paperwork can feel overwhelming. One of the forms employees must complete is a W-4, Employee’s Withholding Certificate. This form tells employers how much money to withhold from the employee’s pay for federal income tax.
It’s important for employees to know the correct amount of tax to withhold so they don’t owe too much money when filing their tax return or have too much money withheld from their paychecks.
Get tax withholding right.
Federal income tax is a pay-as-you-go tax. Taxpayers pay the tax through their employers as they earn or receive income during the year. Employers take out – or withhold – income tax from employee paychecks and pay it to the IRS in the taxpayer’s name.
If an employee doesn’t have enough tax withheld, they may face an unexpected tax bill and a possible penalty when they file a tax return next year. If they overpay or have too much tax withheld during the year, the employee will likely get a tax refund when they file their tax return. Adjusting the tax withheld up front may mean a bigger paycheck throughout the year.
Form W-4, Employee’s Withholding Certificate
New employees must complete Form W-4 so that their employer can withhold the correct amount of federal income tax from their pay. Employees should read the instructions carefully. The employer will base the amount of withholding on the information the employee provides on their W-4 and how much the employee earns.
People can also submit a new W-4 when their personal or financial situation changes and they want to update their withholding.
Taxpayers can use the Tax Withholding Estimator
If a taxpayer isn’t sure how much tax they should have withheld, they can use the Tax Withholding Estimator tool on IRS.gov to:
• Estimate their federal income tax withholding.
• See how their refund, take-home pay or tax due is affected by their withholding amount.
Not all workers are employees
Workers are classified as either contractors or employees according to certain rules. Workers who are independent contractors need to pay their taxes directly to the IRS. Depending on how much they earn, they may need to pay estimated tax on a quarterly basis.
Keep tax forms in a safe place.
Form W-2, Wage and Tax Statement, is a taxpayer’s record of the income they received throughout the year and the amount of money withheld for federal, state, local and other taxes. Employers typically send these out in late January each year. Taxpayers should keep all the tax documents they receive and store them in a safe place so they are available for filing an accurate tax return.
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A new year means a fresh start. One way people can get the new tax year off to a good start is by checking their federal income tax withholding. They can do this using the Tax Withholding Estimator on IRS.gov.
This online tool helps employees avoid having too much or too little tax withheld from their wages. It also helps self-employed people make accurate estimated tax payments. Having too little withheld can result in an unexpected tax bill or even a penalty at tax time. Having too much withheld results in less money in their pocket.
All taxpayers can use the results from the Tax Withholding Estimator to determine if they should:
• Complete a new Form W-4, Employee’s Withholding Allowance Certificate and submit it to their employer.
• Complete a new Form W-4P, Withholding Certificate for Pension or Annuity Payments and submit it to their payer.
• Make an additional or estimated tax payment to the IRS.
The Tax Withholding Estimator asks taxpayers to estimate:
• Their 2021 income.
• The number of children to be claimed for the child tax credit and earned income tax credit.
• Other items that will affect their 2021 taxes.
The Tax Withholding Estimator does not ask for personally-identifiable information, such as a name, Social Security number, address and bank account numbers. The IRS doesn’t save or record the information entered in the Estimator.
Before using the Estimator, taxpayers should gather their 2019 tax return, most recent pay stubs and income documents including:
• Form W-2 from employers.
• Form 1099 from banks and other payers.
• Forms 1095-A from the marketplace for those claiming the premium tax credit.
• Form 1099-NEC, Nonemployee Compensation.
Most income is taxable, including unemployment compensation, refund interest and income from the gig economy and virtual currencies. Therefore, taxpayers should also gather any documents from these types of earnings. These documents will help taxpayers estimate 2021 income and answer other questions asked during the process.
The Tax Withholding Estimator results will only be as accurate as the information entered by the taxpayer. People with more complex tax situations should use the instructions in Publication 505, Tax Withholding and Estimated Tax. This includes taxpayers who owe alternative minimum tax or certain other taxes, and people with long-term capital gains or qualified dividends.