This blog is based on episode 121 of Business by the Numbers. Host, Hunt Demarest, CPA with Paar Melis and Associates, explores a topic that affects everyone in your shop: withholding on your W-4 forms. Whether it’s for you, your employees, or even your kids, understanding withholding is crucial to avoid tax surprises come April.
What is a W-4 Form?
The W-4 form determines how much tax your employer withholds from your paycheck. Accurate withholding ensures you don’t owe a large amount of money at the end of the year or get too large a refund, which essentially means you’ve given the government an interest-free loan.
Filling Out Your W-4: Step-by-Step
- Basic Information: Fill in your name, address, social security number, and filing status (single, married, or head of household). Triple-check your social security number to avoid errors. Make sure your name matches your social security card to avoid processing issues. If you are single or not sure about your filing status, it’s safer to check the “single” box to ensure higher withholding.
- Multiple Jobs or Spouse Working: If you have multiple jobs or a working spouse, use the IRS worksheet to ensure correct withholding. This step is crucial to prevent under-withholding, which could lead to a hefty tax bill. For multiple jobs, compare the higher and lower paying jobs and use the worksheet to calculate the correct amount to withhold. If you or your spouse earns significantly more, consider marking “single” even if you are married to withhold more.
- Claim Dependents: For dependents under 17, multiply the number by $2,000 and for other dependents, multiply by $500. This helps reduce your taxable income. If you prefer to be conservative and ensure you don’t owe taxes, consider claiming fewer dependents on your W-4. This section is straightforward: list your qualifying children and dependents accurately to get the right amount withheld.
- Other Adjustments: You can add other income (not from jobs) or extra deductions if you itemize. Most people won’t need to fill these sections unless they have significant other income like dividends or substantial itemized deductions. Be cautious with this section; incorrect entries can lead to incorrect withholding amounts. If in doubt, leave it blank or consult a tax professional.
- Extra Withholding: If you want to withhold extra money to avoid owing taxes at year-end, specify that amount here. This is particularly useful for business owners or those with fluctuating incomes. For example, if you owed $5,000 in taxes last year, you can divide this amount by your remaining pay periods and add that extra amount to your withholding to avoid future tax bills. This section is flexible and can be adjusted as needed throughout the year.
Special Cases: Business Owners and Kids
For Business Owners: If you’re self-employed and also take a salary, you should withhold more to cover both your salary and business income. A good rule of thumb is to select “Single” and put “0” in exemptions to ensure maximum withholding.
For Your Kids: If your child works and makes less than the standard deduction (around $14,000), they are exempt from federal withholding. Make sure to mark their W-4 as “Exempt” to avoid unnecessary withholdings.
Practical Tips for Employers
- Ensure all employees understand how to fill out their W-4s correctly.
- Advise employees with multiple jobs or complex tax situations to consult a tax professional.
- Keep copies of updated W-4 forms to adjust withholdings as needed throughout the year.
Accurate W-4 forms prevent tax-time headaches for you and your team. Make sure everyone in your shop is informed and prepared. If you have any questions or need further guidance, feel free to contact me at podcast@parmelis.com. Stay safe, and have a great week.
