How to Fill Out a W-4—Plus, 7 Reasons to Adjust Your Tax Withholding

Confused about how to fill out a W-4 at work? Laura explains what it is and how to complete it correctly. Plus, you'll learn 7 reasons when you should adjust your withholding so your employer doesn’t take out the wrong amount or leave you with an unexpected tax bill.  

Laura Adams, MBA
9-minute read
Episode #490


While getting a refund might seem like free money, it isn’t. You’re just finally getting back your own money that you paid into the system in the previous year. Getting a tax refund means that you gave the IRS an interest-free loan instead of keeping it for yourself and using it to improve your financial health by saving, investing, and paying down debt throughout the year.

Also consider how you’re likely to use a tax refund windfall. Would you use it more wisely or less wisely than if the money had come to you gradually over the year in each paycheck? You may feel that it’s too tempting to get a big tax refund and not blow it on something frivolous, like a vacation. Or you may feel the opposite, that you could do more financial good with a lump sum windfall.

So, be realistic about how you’ve spent tax refunds in the past. If you’ve used them like a forced savings plan in ways that truly improve your finances, overpaying taxes isn't the worst financial move you could make.   

However, my advice, in general, is to have withholding that matches your actual tax liability as closely as possible. An exception comes into play when you expect a larger than normal tax bill and want additional withholding to cover it.

For instance, if you have self-employment income in addition to your regular W-4 job or you expect a financial windfall during the tax year, you’ll have to pay more tax. By voluntarily increasing the amount of tax deducted from each paycheck, you can avoid having to make a big lump-sum tax payment at the end of the year.

If you don’t complete a W-4 your employer will simply assume that you have zero allowances and deduct the highest amount of tax, which could be way too much

And if you expect to earn very little, you can also indicate on a W-4 that you should be exempt and have no tax withheld from your pay. For instance, if you’re single, under age 65, and earned less than $10,350 in 2016, you don’t have to pay tax.  

Employers use tables published by the IRS each year to figure out how much to deduct from your paycheck based on your filing status (such as single or married filing jointly), gross income, and withholding allowances you claim.

If you don’t complete a W-4 your employer will simply assume that you have zero allowances and deduct the highest amount of tax, which could be way too much. So always take charge of your taxes by completing withholding forms the best way you can.

Related: A Checklist to Measure Your Personal Finance Success

7 Reasons to Update Your W-4 Form Tax Withholding

One of the biggest misconceptions about a W-4 or state form is that you can’t change it. The truth is that you can and should submit new withholding forms to your boss or payroll department any time something major changes in your life that affects your tax situation.

So, don’t set and forget your withholding. Some employers may send out an annual reminder about this, but others won’t. So, put a note on your calendar to revisit this at the beginning of each year or at some other anniversary, such as your open enrollment period for insurance benefits.

If nothing has changed, you’re not required to complete a new form each year, unless you’ve claimed that you’re exempt from withholding. Here are 7 key reasons you should update your W-4:

1.    Your income increases. Let’s say you get a second full- or part-time job, do freelance work, or start a home business on the side. Your tax liability typically goes up as you earn more. Even if your additional income comes from a side hustle with no W-4, you can adjust the form at your main job to account for it. No explanation to your employer is needed. 

2.    Your spouse’s income increases. If you’re married, both work, and file taxes jointly, any change in your household income will affect your taxes. So, evaluate your withholding as a couple using your combined income to figure allowances. One spouse could claim all of them, or you can divide them between both of your W-4s. The second page of the W-4 includes a worksheet to help figure allowances when there are two-earners in a household.

3.    Your income goes down. If you (or a spouse) lose side income or become unemployed for part of the year, you may have too much tax withheld. Increasing the number of allowances on your current W-4 or when you complete one at your next job in the same year, will reduce your withholding.

4.    Your marital status changes. Getting married or divorced radically changes your tax situation. You may also begin receiving alimony, which is taxable income. So be sure to adjust your W-4 as soon as you’re officially hitched or un-hitched. If you wish, you can claim an allowance for a spouse, which as I previously mentioned, reduces your withholding.

5.    You become a parent. Having or adopting a child is a major tax event because it qualifies you for new deductions and credits. You can claim an additional allowance for each dependent, reducing your withholding.

6.    You qualify for new tax benefits. When you qualify for tax deductions or credits, your tax liability goes down. For instance, if you claim the home mortgage interest deduction, medical expense deductions, or make retirement account contributions, they should be a signal to review your withholding. The second page of the W-4 includes a worksheet to enter deductions and other adjustments into the mix.

7.    You got a large tax refund. If you get a refund of more than a few hundred dollars and expect your life and financial situation to be the same in the current tax year, consider increasing your allowances so you have less withheld and get a bigger net paycheck going forward.

See also: How to Pay Less in Taxes (Part 1)


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a trusted and frequent source for the national media. Her book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show. 

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