Withholding allowances aren’t really a thing anymore. Get step by step guidance on how to fill out the 2021 W4 form here.
Withholding allowances help employers determine how much federal income tax to withhold from each employee’s paycheck. Employees typically select the number of allowances on Form W-4.
An employee’s withholding allowances are typically based on their tax filing status and how many jobs and dependents they have. In general, allowances work this way:
- More allowances = More pay (less tax withheld)
- Fewer allowances = Less pay (more tax withheld)
What is a W-4 and how does it work?
A W-4 is a worksheet that helps employees select the right number of withholding allowances.
The form has a number of questions for employees to answer, including:
- Are you married?
- Does your spouse work?
- Do you have dependents?
- Do you have more than one job?
Their answers factor into the number of allowances an employee ultimately claims. Employees fill out a W-4 when they’re hired and can update it anytime a significant life event might change the number (like getting married).
Seems simple enough. What happens if an employee claims the wrong number of allowances?
One consequence could be that the employee will have too much tax withheld from his or her paycheck. This results in having a big refund come tax time. And despite what some people might think, you don’t want a big tax refund because you’re essentially giving Uncle Sam an interest-free loan until the refund arrives.
The other consequence of choosing the wrong number of allowances is that an employee may receive too much income and not have enough tax withheld. When it comes time to file his or her tax return, an employee who didn’t withhold enough may wind up owing more taxes. That means cutting a check to the IRS.