Filling out and submitting a Form W-4, the Employee’s Withholding Allowance Certificate, enables your employer to withhold the correct amount of federal income tax from your pay. Using the form, you calculate the number of allowances that you can claim on your taxes by totaling your dependents, deductions, and adjustments to withholding. (Please note: Clergy are exempt from federal income tax withholding and may voluntarily choose to have federal income taxes withheld from their wages.)
Why should I calculate my allowances?
Calculating the correct number of allowances will ensure that your employer will not withhold too much or too little for federal taxes. The more withholding allowances you have, the smaller the amount of federal taxes withheld from your wages. Having too many allowances may cause a significant tax bill due when you file your tax return. On the other hand, having too few allowances may provide a refund.
I like getting a refund. Is that bad?
Getting a refund is not bad or good, per se. However, when you get a refund, you have essentially provided the government with an interest-free loan. Is that what you intend? It may be more advantageous for you to increase your withholding allowances to increase the amount of income in your pocket during the year and get a smaller refund when you file your taxes.
I have income that I make from a small business on the side. Can I decrease the allowances claimed from my main employment to cover my side business income?
Yes. Form W-4 has a worksheet to help you determine the additional income tax your employer should withhold.
When can I change my Form W-4 withholding allowance certificate?
Withholding allowances can be changed at any time by submitting a new Form W-4 to your employer.