Tax Withholdings – How Does Withholding System Work For Employees, What Is A W4, and How To Understand It?
A withholding tax is an amount that employers withhold from employees’ wages and pay them directly to the federal and/or state government. This amount is a credit against the income taxes that employees have to pay once the year ends. It is also levied on income from securities. Whenever someone is hired, one of the pieces of paper that their employer asks them to complete is a Form W-4 or Employee’s Withholding Certificate as it is known. The way employees fill it out determines how much tax employers will need to withhold from their paychecks.
What Is A Form W-4?
When someone starts a new job, they will need to fill out a W-4 Form. It is crucial that you fill out the form with great care as the IRS requires US residents to pay taxes on income throughout the year. If you fail to withhold enough tax, you would end up owing a large sum plus interest and penalties. However, if you withhold too much tax, your monthly budget would become tight. Besides, it would only result in you providing an interest-free loan to the government when you could have easily invested that extra money or saved it for a higher return.
Moreover, you would have to wait until the following April to get your overpaid taxes back when filing your annual tax return. The overpaid taxes would be refunded to you. However, you might treat the money as a gift from the government and use it less wisely. Anyone who fails to submit Form W-4 would have their employer withholding their wages as though you have no other adjustments as directed by the IRS.
How Can You Fill Out The Form W-4?
In 2020, the IRS redesigned Form W-4 and removed the option to claim any personal allowances. In the past, the form came with a personal allowances worksheet which helped you calculate the allowances that could be claimed. It allowed one to show their tax situation to ensure that the employer withheld the right amount of money from the paycheck. The more allowances a person claimed on Form W-4 the less amount of money their employer could withhold. You can visit the IRS website to download the form.
The reason behind the form being revised is that it aims to make the process of determining how much employers need to withhold easier. Filling out a W-4 is easy if you are single or have a spouse who is not working and only have income from one job without any dependents requiring money from you. To complete the latest form, you only need to enter your name, Social Security Number, address, and filing status. Make sure to sign and date the form before submission.
Hire an Accountant to Help You Fill Your W-4
Although you can try to fill your W-4, it is always better to let an accountant help you, especially if estimating your taxes is more complex such as if you have dependents, income from other jobs, tax credits, deductions, and a spouse who works.