How to Fill Out W4

The concept behind the new W-4 is a stroke of brilliance by the IRS (one of the few I’ve ever seen them have). Since the Tax Cuts and Jobs Act did away with personal exemptions, the withholding allowances on the old W-4 are obsolete. Even when they were relevant it was way too easy to overestimate your allowances and wind up underwithholding. Which meant, you guessed it, a big fat tax bill at the end of the year. Not only does the new W-4 better suit our new tax laws but it also takes into account additional sources of income, another sore spot in the old withholding system. You see it’s not that uncommon for households or individuals to have more than one job, or a job with some self-employment income on the side (something becoming more and more frequent with the development of the new gig economy). Under the previous W-4, wages from each job were considered individually when calculating the amount of tax to withhold. However, at the end of the year when the income was combined taxpayers often found themselves in a higher tax bracket which meant their annual withholdings just weren’t enough to cover their tax bill. For example, consider the tax for a single individual with $30,000 of income, it would be $1,945. But wait, this individual actually has two jobs generating $30,000 of income each. Now their tax bill is $6,369 and the $1,945 withheld from each job (that’s $3,890 total) is no where near enough to cover it. This is where the new W-4 really shines. It takes your highest paying job and tacks on the additional withholdings required to make sure you cover the gap between your individual jobs and the combined earnings. This additional withholding can also help cover some of the tax on those new gig economy jobs because let’s be honest it’s way to easy to forget about making estimated tax payments on self-employment income (if you’re not familiar with estimated tax payments check out our blog: how to make estimated tax payments). Keep in mind it won’t account for the 15.3% self-employment tax, but it can cover the income tax related to it. And I think we can all admit it’s much easier to pay your taxes when it’s automatically being deducted from your wages gradually then when you have to voluntarily fork it over in large sums. Other notable mentions about the new W-4, it properly takes into account dependent credits which go directly against your total tax due, as well as itemized deductions that reduce your taxable income. Like anything new with taxes, the new W-4 looks complicated which is intimidating, but I would highly recommend filling one out ASAP. Not only will your HR department thank you kindly, but your wallet will love you at the end of the year. Many companies have transitioned to maintaining HR records electronically, including your W-4, but in case your company is still using hard copies here is a link to the new form. To see an example of how to fill this bad boy out, check out our video: Filling Out the New W-4.

Something to keep in mind. The new W-4 is designed to withhold as close to your actual tax bill as possible. Personally, I think this is a win since overpayments to the IRS are nothing but interest free loans to the government and you can definitely put your money to better use than that. However, I know some people are really attached to those large refund checks at the end of the year. Previously, that just meant claiming fewer withholding allowances. I’ll admit, now it’s a bit more complicated, but here would be my suggestions for how to do it. If eligible, don’t take the dependent credits just leave that section blank. Don’t list itemized deductions, then the form will default to the standard deduction. List an additional amount you would like to withhold each pay period. Finally, even if you’ll be filing married filing joint or head of household select single as your filing status on the form. Any one or a combination of these would create a decent overpayment.

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Jordan Sumpter

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