What Is Form W-4?

Officially known as the Employee Withholding Certificate, form W-4 is an IRS form that an employee in the United States fills to enable his employer to count how much federal income tax should be withheld each paycheck. Since the tax system used in the U.S. is a pay-as-you-go system, there will be withheld taxes that will be remitted to the IRS by their employer during the year. Your response on Form W-4 will have a direct impact on whether you would pay an extra tax or get a refund when you file your annual tax return.

In 2020, the IRS reformulated Form W-4 to tax withholding to be more precise and comprehensible. Rather than take allowances (which were repealed under the Tax Cuts and Jobs Act) the new form takes a step-by-step approach that considers filing status, dependents, multiple jobs, and other income. Employees may also claim additional withholding in case they are likely to owe more or withholding less in case they qualify to claim some deductions. What Is Form W-4?

You are required to fill out a W-4 when you begin a new employment, however, it is possible to fill a new form at any point in time provided that you have a change in your financial conditions, i.e. you are getting married, having a child, taking a second job or income has had a drastic change. It is always good to update your W-4 to have the right amount of tax withheld during the year.

The employers only use the information in Form W-4 to payroll taxes. It does not define benefits eligibility, wage and job status. Most tax-payers do seek to match their annual tax-liability as closely as possible, but others seek to have higher withholding so that they can get a larger refund, and others vary their W-4 to achieve large take-home pay.

Form W-4 in a nutshell is a critical facility in the management of your federal tax withholding. It can be useful in avoiding unpleasant tax surprises and ensuring your financial planning is on schedule by filling it out correctly and keeping up with it.