Many people fill out Form W-4 multiple times throughout their careers without really understanding how it affects their tax bill. However, every employee must fill out Form W-4. The form lets your employer know how much federal tax to withhold from your paychecks. In 2020, the IRS made significant changes to Form W-4 to improve transparency and increase payroll withholding system accuracy. We will discuss Form W-4's purpose and how to fill one out correctly.

Explaining Form W-4

Form W-4 is known as the "Employee's Withholding Certificate." It is an IRS form that employees fill out to communicate to employers how much federal tax to withhold from each paycheck. Employers use Form W-4 to calculate payroll taxes which sends the taxes to the IRS and the state for the employee.

If you already have a W-4 form on file with your employer, you do not need to complete one every year. However, you need to complete and submit a W-4 form to your employer whenever you start a new job. Also, if you ever want to change your withholdings at your job, you may need to complete a new W-4. Whatever the reason for filling out a W-4 form, it can be a great way to evaluate your withholdings.

Using Form W-4

Form W-4 allows you to pay federal taxes like the federal income tax. Federal income taxes fund a wide range of national programs, including:

• Law enforcement.
• National defense.
• Veteran and foreign affairs.
• Community development.
• Social programs.
• Interest on the national debt.

Updated Form W-4

The new and updated version of Form W-4 eliminated the option to claim personal allowances. Personal allowances enable you to claim allowances so that your employer would withhold less tax from your paycheck.

The new form also allows you to note whether or not your circumstances warrant more or less withholding. For example, it asks whether or not you have income from a second job or expect to have deductions that you will itemize when you receive your tax return.

Completing Form W-4

Form W-4 comes in a four-page packet, but the document itself is only one page and has just five steps:

Step 1) Personal Information

Provide the following:

• Your name and address.
• Your Social Security number.
• Filing status (single, married, or married and filing separately).

Step 2) Account for Multiple Jobs

This section is for individuals with more than one job or filing jointly with their spouse who also works. Fill out steps 2 to 4(b) for whichever W-4 you're using for the highest paying job. You can leave those steps blank on the other W-4(s).

Step 3) Claiming Dependents

This step allows you to claim dependents, like if you have any kids. For anyone making an income under $200,000 (or $400,000 for joint filers), you can enter your total number of dependents and multiply that by the credit amount.

Step 4) Further Adjust Withholdings

This step is an optional section where you may choose to get more or less (if you are eligible) tax withheld from your paycheck. If you want more taxes withheld, or you'd like to claim deductions other than standard ones, this is where you can do that. People often increase the amount taken out, so they get a more considerable sum back during tax returns at the end of the tax year.

Step 5) Signature

This step is the last part of the W-4 form, where you need to sign and date the document.

Reasons to Revise Your W-4

The latest iteration of Form W-4 has the most significant updates since enacting the Tax Cuts and Jobs Act in 2017, which made considerable changes to withholding. Due to the new version, it may be best to reevaluate your form if you have been with the same employer for years.

Another reason to revise your W-4 is by determining if you received a tax refund or had to pay taxes. Owing a lot in taxes shows that you underpaid taxes for that year. However, if you have a large refund, you overpaid in taxes. In some cases, adjusting your withholdings can change what you owe in taxes or what you get back as a refund.

Furthermore, suppose you recently got married or divorced, had a child, or started a new freelance job (in addition to your current job). In that case, it is a good idea to revise your W-4 as there will likely be changes to it.