Payroll

How Do I Fill Out a W-4?

People often claim 0 to 3 withholding allowances on the W-4, or even more if they qualify.

But, how many allowances should you claim? Ay, that’s the rub. And it’s a question you should likely talk to a CPA or accountant about. But to help you out, here’s a few pointers to get you started.

form w-4

Wait, what’s a withholding allowance again?

As a refresher, the number of withholding allowances you pick is the same as your withholding number. That magic number tells your employer how much money to withhold from your paycheck for any federal, state, and local taxes you owe.

Here’s where things can get a little confusing. A withholding allowance reduces the amount of income tax withheld from your paycheck. So if you claim more allowances, less money is taken out of your paycheck for taxes.

Gotcha! So how do I figure out the right number of allowances?

You can calculate your number by filling out the “Personal Allowances Worksheet,” on page 3 of the W-4.

To start, fill out questions 1-10 on that fun little worksheet. Here’s what it looks like:

W-4 Page 3

Lines A-C should be pretty straightforward. In this section, people typically claim:

  • 1 for themselves as a personal allowance
  • 1 if they’re married and file a joint return
  • 1 if they file as head of household

Line D is a little more involved. Taxpayers will enter “1” here if:

  • they are filing “married filing jointly” and have a spouse who doesn’t work
  • they are single and only have one job
  • their second job or spouse’s job pays them less than $1,500

And finally, there are Lines E-H, which tend to trip folks up. Let’s walk through those four items:

E. Child Tax Credit (CTC):
  • What it is: The CTC is a dollar-for-dollar reduction of your tax liability. The credit is up to $2,000 per qualifying child for the 2018 tax year, filed in 2019. The CTC is also refundable, but only up to $1,400. That means if you have a credit for $2,000, but only owe $1,000, the IRS refunds you $400.
  • How you qualify: You can only claim the CTC for qualifying children under 17 years of age. To qualify, the child usually has to be related to you (including by adoption), live in your home for more than half the year, and must not provide more than half of their own support.
  • How to claim the credit: To figure out your allowance for the credit, fill out Line E based on the income levels in Section E. For example, if you are single and make less than $69,801, you can enter “4” for each qualifying child. Or, if you are married and make between $101,401 and $339,000, you can enter “2” for each eligible child on Line E.
  • The exceptions: Like many credits and deductions, there are thresholds and phaseouts for the CTC. In 2018, you must have at least $2,500 of earned income to claim the credit. On the other end, taxpayers who made more than $200,000 ($400,000 if married filing jointly) will not qualify for the entire CTC. If this is you, enter “0” on Line E.  
F. Credit for other dependents:
  • What it is: This is a $500 credit for other dependents who do not qualify for the CTC.
  • How you claim the credit: Like with the CTC, your income and number of eligible dependents will determine the allowance. This time, the instructions are in Section F. For example, if you are married and earn between $101,401 and $339,000, you will enter “1” on Line F for every two dependents.
  • The exceptions: Similar to the CTC, there are income thresholds for this credit. For example, if you are single and earn $69,801 or less, you’ll enter “1” for each eligible dependent.
G. Other credits:
  • What they are: This line consists of various credits that can be converted into withholding amounts.
  • How you qualify: You can figure out if you can claim this credit by completing Worksheet 1-6 of Pub. 505.
H. Your total!

Here’s where you do the math and get your withholding number. And this is the number that your employer will use when calculating your paycheck.

What about the other parts of the W-4?

There are two other sections that are on the W-4, that you may or may not need to fill out:

  • The Deductions, Adjustments and Additional Income Worksheet on page 3, and
  • Two Earners/Dual Income Worksheet on page 4.

Not everyone fills them out, but here’s a heads up on how those two sections work:

The Deductions, Adjustments and Additional Income Worksheet

The Deductions, Adjustments and Additional Income Worksheet
  • What is it: This worksheet is for taxpayers who plan to itemize deductions, claim certain adjustments to income, or have a large amount of nonwage income. In other words, this section is meant for people who want to claim specific adjustments or deductions (instead of only taking the standard deduction), or want to increase their tax withholding to account for taxes on non-wage income.  
  • When to fill it out: You should fill out this worksheet if your itemized deductions will be greater than $12,000 if filing as single; $18,000 if filing as head of household; or $24,000 if you’re married filing jointly.
  • Heads up: Because of the new higher standard deductions, many taxpayers who have itemized in the past will no longer have to. So when looking at this worksheet, have a good estimate of what your itemized deductions might be. If they’re under the amounts above, you don’t have to do anything else.

Two Earners/Dual Income

Two Earners/Dual Income
  • What it is: This is a worksheet for people who have more than one job, or a spouse that also works.
  • When to fill it out: You should fill out this worksheet if you have more than one job and your total earnings are greater than $52,000, or are married and your spouse works and your combined income is greater than $24,000.
  • How to fill it out: Follow the instructions to determine the additional amount, if any, to be withheld from your paycheck. If you have a second job, you’ll need to know how much it pays. Likewise, if your spouse works, you will need to know what their wages are to calculate the additional withholding.

Now, all this can get confusing. It’s often best to ask a CPA for guidance on your personal situation.

I’m on the fringe. Should I claim a bigger or smaller number of allowances?

It depends.

Most CPAs and personal finance experts say that the right number of allowances is what will get you as close to meeting your actual tax liability as possible. In other words, you’re aiming for neither payment nor refund on your tax return.

That means a “good” withholding number is one that leaves you with either a small refund or a small tax bill—nothing too dramatic here.

Here’s why: You shouldn’t withhold so much money that you give the government an interest-free loan throughout the year. (That being said, a lot of people do just that. The IRS found that the average refund in 2017 was a high $2,931.)

You also don’t want too little withheld and then have to cut a big check at tax time. Plus, IRS penalties may apply if you owe too much additional tax at the end of the year.

The key? Get as close to your tax liability as you possibly can.

And finally, your withholding number depends on your unique tax situation and may need to be revisited every year. So run through page 3 on your W-4 and calculate the number that works best for you.

Spend 75 percent less time on payroll with Gusto. See how.

This article provides general information and shouldn’t be construed as tax advice. Since tax rules may change over time and can vary by location and industry, please consult a CPA or tax advisor for advice specific to your business.