Ah, the good old W-4. As a current college student or recent graduate, you’re probably in the process of applying for your first or second job, and it’s important to understand what the W-4 form is and how it will be helpful to you now or in the future. So here are some tips you can use to ensure that your W-4 saves you a lot of grief around this time of year.
The W-4 tax form tells your employer the amount of federal income tax they should be withholding from each of your paychecks. And the person who determines that amount is you. The goal is to make sure that you are setting aside the proper amount of federal income tax per paycheck so that you do not owe the IRS anything at the end of the tax year (around now). The number of allowances you claim determines this.
The logic is straightforward: the less allowances you claim on your W-4, the more money will be taken out of your paycheck and held by Uncle Sam. Vice versa, the more allowances you claim, the less money will be taken out of your paycheck. For standard taxpayers who are single and have one job, the typical allowances they claim range from 0-2.
If you claim a “0” on your W-4, you’re taking the safe route. This means that your employer will withhold the maximum amount of federal income tax per paycheck, meaning your net take home will be less. But the flip side is that claiming a “0” usually means receiving a nice refund at the end of tax season. Some people enjoy this perk because they see it as an effortless way to save throughout the year, using their refunds for vacations or other expenses. It’s like finding $20 in the pocket of the jeans you haven’t worn in months.
If you claim a “1” on your W-4, you’re still in good shape. Most people see a “1” as a good balance between not having too much withheld from their paycheck while at the same time ensuring that enough is withheld to cover all of their taxes. With a “1,” you’ll probably still receive a refund, but the amount won’t be as substantial.
If you claim a “2” on your W-4, you’re hoping to break even. Some people claim “2” so that they get more out of their paycheck while still withholding enough to cover a majority of their taxes. At the end of the tax year, those who claim “2” will either break even or end up paying a small amount to the IRS.
This last and final option, and one that we highly recommend, is for those of you who would prefer to have not too much or not too little withheld from your paychecks and want to know exactly where your finances stand at the end of the year. You can do this by going to line 6 on the W-4 form and specifically stating any additional amount you want withheld from each paycheck. This way, you can determine whether or not you want to receive a refund (and in what amount). You can set up a meeting with your local tax professional who can help you determine this.
Remember that you can update your W-4 any time. Make sure you always update your W-4 every year. Or, if you find that you want to swtich your number of allowances at any time, you have the right to do so and it will normally be reflected in your next pay period.
We understand that everyone is different and has different preferences/needs, so remember to use the one that works best for you. Happy Busy Season!