It’s just about tax time and almost nothing drives anxiety more than worrying if you might owe a lot at tax time. Or, maybe you’re in the camp that looks forward to the big refund at tax time. But then what if your refund isn’t as big as you’d hoped? Have you reviewed your W-4 lately?
Whether you prefer to owe a little, get a little refund, or get a big refund, the number one factor driving your experience at tax time is how you completed your W-4. It’s that important! But, you’re only required to complete a W-4 ONCE . That means the biggest driver of your tax season experience might be a form you haven’t even thought about in years!
What is the W-4
The W-4 is the “Employee’s Withholding Certificate”. It’s the form that tells your employer how to calculate the amount of Federal tax they should withhold from your paycheck. The goal of the form is to approximate tax withholding as accurately as possible so that you neither owe taxes nor receive a refund at tax time.
Breaking it down
Your annual tax bill is primarily driven by four things:
- Filing status – Your filing status drives the tax brackets used to calculate your total tax bill as well as limitations applied to tax credit eligibility and some other things.
- Total household income – the more income you and your spouse earn, the higher tax rate you pay. Keep in mind that income includes: military retirement pay, interest/ dividends earned on savings or investment accounts, and capital gains from the sale of assets (like stocks, property, etc).
- Deductions – deductions lower your tax bill by allowing you to deduct income. In other words, deductions lower your taxable income. You can either:
- itemize your deductions – add up your mortgage interest, all taxes you’ve paid, and some other allowable deductions or,
- take the standard deduction. The standard deduction for 2023 is $13,850 for single filers/ $27,700 for married filing jointly filers. Because the standard deductions are so high right now, the majority of people simply take the standard deduction.
- Credits – credits lower your tax bill by subtracting the amount of tax you owe. A common tax credit is the child tax credit which can be up to $2,000. Let’s assume you qualify for the child tax credit. Let’s further assume that your tax bill is $10,000. With the child tax credit your bill would be $2000 less or $8000.
How the W4 Works
Your employer only knows one thing about your tax situation – they know how much income you earn with them. Unless you review and update your W-4, they don’t know your current filing status, if you have a second job, if your spouse earns an income, if you have savings/ investments that pay interest or dividends, whether you plan to sell an asset, whether you have children or are eligible for other types of credits.
The W-4 is meant to provide more of this information to your employer so they can adjust your withholdings appropriately.
Completing/ Reviewing your W-4
There are only two sections you absolutely must complete on the W4: Section 1 and Section 5. Section 1 includes your name, address, SSN, and filing status (single, married filing jointly, etc) Section 5 is your signature.
If you are single, have no children, and no other income sources, Sections 1 and 5 are all that’s needed.
Completing/ Review Your W-4 for More Complex Situations
If you are married filing jointly, have children, or other income sources, then complete Sections 2, 3, and/ or 4.
Multiple Jobs? Spouse Works?
If you have a spouse with a job or if you have more than one job, Section 2 is for you. The verbiage in this section can seem confusing so let’s break it down.
Let’s start with the easiest option. If there are only two jobs in your household (you have 2 OR you have 1 and your spouse has 1) AND the income from the lower paying job is at least half the income from the higher paying job, then you can just check the box at the end of “c)” in Section 2.
In other words, if your income is $100,000, then it’s easier and more accurate to simply check the box as long as the income from the other job is at least $50,000 or higher.
If you earn much less in your side gig, or your spouse earns much less than you (less than half), then you’ll want to either use the estimator tool at www.irs.gov/W4app or use the Multiple Jobs Worksheet that’s part of the complete W-4 (link here). Both methods will provide insight on whether you should add an amount to Line 4(c) in Section 4. This is the amount of additional withholding your employer will withhold from each paycheck.
The estimator tool is very detailed but it’s accurate and will provide a pre-filled W-4 that you can download and either submit directly to your employer OR, if you’re military, you can use the info to update your W-4 in myPay.
Dependent Credits and Other Credits
If you have children or other dependents, you will want to complete Section 3. Thankfully it’s more straightforward than Section 2. Is your household income more or less than $250,000 (single) or $400,000 (married filing jointly)? How many dependents do you have under age 17? How many dependents do you have who are age 17 or older? Then do some simple multiplication.
Other Adjustments
In Section 4, you get to include information about any other income sources, besides jobs. If you’re retired from the military then you have a taxable pension. You may have savings/ investment accounts that pay interest and/ or dividends.
You also get to include information about deductions. Recall from above that most people use the standard deduction now. So you’ll enter the standard deduction. If you itemize deductions on your taxes, then add your estimated itemized deductions instead.
Now is the Time to Review your W-4
If you haven’t looked at your W-4 since 2019 then your W-4 is definitely out of date. In December 2019 there was a huge change to the W-4. If you haven’t made changes since then, then your W-4 is most likely nothing more than Section 1 and Section 5.
If, since 2020, you’ve owed more than normal or get a refund that’s substantially different from what you were used to, the W-4 format change is likely the reason. Your employer just doesn’t have enough information about your situation to accurately withhold Federal taxes. Take a look at your W-4 and make updates as needed.
When you make updates to your W-4 you should expect the net pay that hits your checking account to change. The amount may be higher or lower depending on your situation. If you make the changes early in the year, the changes will likely be smaller than if you wait until later in the year. So now is the perfect time to review your W-4.