Filling Out Your W-4 Form For That New Job.

When working on people's taxes and have them have a balance due after starting that new job, I have to have a conversation explaining how the new W-4 form works.  You know, that form you have to fill out to tell your employer how much money to withhold from your paycheck to cover your tax liability.

If you don't like owning taxes at the end of the year, then here are some things you should know:

1. When you have to fill out a W-4 form

You are not required to file a W-4 form with your employer each year, but a lot of people don't realize that you are allowed to fill out a new form any time your situation changes.  Like you get a second income coming into the household, get married or you have a new child.

• However, you must complete a W-4 form to start a new job. That is the only way your new employer will know how much federal income tax to withhold from your wages.
• You also must file a new W-4 form if you want to adjust the amount of tax your current employer withholds from your paycheck.

Ideally, you want your annual withholding and tax liability for the year to be close so that you don't owe a lot or get back a lot when you file your return. Remember, a large tax refund means you gave the IRS an interest-free loan.  (I often explain this to people who have large refunds and the answer I usually hear is that they use the IRS withholding to save because they don't have the self discipline to put it in a savings account.)

2. The W-4 form is relatively easy if your taxes are simple

The W-4 form can be relatively easy if you are single and only have one job, and your taxes are simple. 

All you have to do is provide your name, address, Social Security number, and single filing status, and then sign and date the W-4 form. Your employer will compute your tax withholding based on the standard deduction and income tax rates for your filing status, with no other adjustments.

3. The W-4 form takes a little longer if your taxes are more complex

For example, you may need to fill out how many children you claim on your return, and how much non-wage income you bring into the household such as retirement income or self-employment income.

4. Having multiple jobs and/or working spouses require more information

This is where most people that the biggest problems in understanding how to fill out a W-4.  You need to understand that he Withholding Tables that employers use to figure the amount of withholding assume that there is only one income coming into the household.   Thus, when there is more than one income coming into the household, an further adjustment needs to be made.

• As a result, if you have more than one job at a time or file a joint return with a working spouse, more money should usually be withheld from the combined pay for all the jobs than would be withheld if each job was considered by itself. 
• Therefore, adjustments to your withholding must be made to avoid owing additional tax and maybe penalties when you file your tax return.
• Fortunately, the W-4 form have sections where you can provide information about additional jobs and working spouses so that your withholding can be adjusted accordingly: Section 2 and Section 4.
• The checkmark in section 2 is used if the both spouses only have W2 income and both make about the same amount of money.
• Section 4 is used if both spouses make much different W2 income, you have retirement income, self-employment income or other income that has no withholding on it.

5. Sections 3 & 4: You can account for tax credits and deductions

The W-4 form allows you to adjust your withholding to account for certain tax credits and deductions. There are lines on the W-4 form to add these amounts. Including tax deductions and credits on the form will decrease the amount of tax withheld, increase the amount of your paycheck, and reduce any refund you may get when you file your tax return.

You can factor in the child tax credit and the credit for other dependents in Step 3 of the form. You can also include estimates for other tax credits, such as education credits or foreign tax credits.

For deductions, it's important to note that you should only enter deductions other than the basic standard deduction on Line 4(b). So, you can include itemized deductions on this line. If you take the standard deduction, you can also include other deductions, such as those for student loan interest and traditional IRA contributions if you wish to reduce the amount of withholding.

If you have multiple jobs or a working spouse, complete Step 3 and Line 4(b) on only one W-4 form. It should be the form for the highest-paying job to get the most accurate withholding.

6. The IRS has an online tool to help you complete a W-4 form

To get the most accurate withholding, use the IRS's Tax Withholding Estimator to help you fill out the W-4 form. You will also want to use this tool if you expect to work only part of the year, have dividend income or capital gains subject to additional taxes (e.g., the additional Medicare tax), or have self-employment income.

You will want a few things by your side before you start using the tool — Such as your most recent federal income tax return and your most recent pay stub (your spouse's, too, if you're married). Collect information for other sources of income as well, such as invoices, statements, and 1099 forms.

7. Setting up extra withholding for non-wage income

If you receive taxable income that isn't from wages, like interest, dividends, or distributions from a traditional IRA, you can have your employer withhold extra tax from your paycheck to cover the extra taxes. Just put the estimated total amount of this income for the year on Line 4(a) of your W-4 form, and your employer will calculate the proper withholding amount for each pay period. 

Don't include income from a side gig on Line 4(a). See below for information on how to get your boss to withhold taxes from your regular paycheck for self-employment income, if you don't want to make estimated tax payments for this extra income.

8. You can set up extra withholding for a side job

Suppose you have a side job as an independent contractor (i.e., not an "employee"). In that case, you can use the W-4 form to have extra taxes withheld from your regular job's paycheck to cover your side job, too.  

• Use the IRS's Tax Withholding Estimator tool. You can also pay self-employment taxes through withholding from your regular job wages.
• However, don't include self-employment income as "other income" on Line 4(a). That line is only for income, not from a job.

I really only recommend doing this if you side job brings in less than a few thousand dollars.  I find that it is more accurate for Schedule C self-employment earners to make estimated taxes as normally they are not sure exactly how much is going to be earned during the year.  Buy sending in estimated taxes (normally 25% to 30% of net profit) quarterly, your withholding will be much more accurate without trying to adjust a W4 during the year to get the withholding correct.

9. You can claim an exemption for no withholding

You can claim an exemption from withholding on a W-4 form. There isn't a particular line for this on the form, but you can claim an exemption by writing "Exempt" in the space below Line 4(c) if you qualify. You must also provide your name, address, Social Security number, and signature.  This is often used by students who have small part time jobs.

Looking ahead to next year, you qualify for an exemption if (1) you had no federal income tax liability in the current year and (2) you expect no federal income tax liability in the next year. (If your total expected income for next year is less than the standard deduction amount for your filing status, then you satisfy the second requirement.)

Note: If you claim an exemption, you will not have income tax withheld from your paycheck, and you may owe taxes when you file your return if you go over the standard deduction. If you do end up owing taxes, you might be hit with an underpayment penalty. However, an exemption is also good for only one year, so you must reclaim it yearly.

10. Extra withholding to increase your tax refund

You can adjust your W-4 form to generate a larger tax refund (or refund in general) if you wish to use the IRS as your 'piggy bank'. Although the tax withholding system aims to produce the most accurate withholding, you can add an extra amount on Line 4(c) for "extra withholding" to increase your income tax withholding and reduce your paycheck. That will either increase your tax refund or decrease any tax you owe when you file your tax return.

If you have a specific refund amount, let the IRS's Tax Withholding Estimator tell you how much to put down on Line 4(c). You can even download a W-4 form with the appropriate amount preloaded on Line 4(c).