“What! Why do I owe the IRS money this year when I have updated the W-4 form on file with my employer?” 

“How do I fill out the form W-4?” 

These are both questions we are frequently asked. It is important to monitor your income throughout the year and make necessary withholding changes to avoid having a balance due when filing your tax return. On the flip side—an overly large refund means you have made an interest-free loan to Uncle Sam.

What is a Form W-4?

Form W-4, Employee’s Withholding Certificate, is a critical document that every employee must complete and submit to their employer. The W-4 information determines how much federal income tax is withheld from your paycheck throughout the year.

Failing to accurately prepare the form can result in an unexpected tax bill and penalty, or conversely, an unnecessarily large refund – which means you lost the opportunity to earn interest in those funds.

This article explains the importance of completing Form W-4 correctly, the consequences of errors or omissions, and best practices for keeping your withholding in line with your actual tax liability.

Why Is Form W-4 So Important?

The federal income tax is a pay-as-you-go system. This means you are required to pay tax as you earn or receive income during the year, either through withholding or estimated tax payments. For most employees, withholding is the primary method of paying income tax. Your employer uses the information you provide on Form W-4 to determine how much tax to withhold from each paycheck and remit to the IRS on your behalf.

How Form W-4 Works

Form W-4 asks for information such as your filing status, number of dependents, and other income, deductions, and credits you expect to claim. The IRS has redesigned Form W-4 in recent years to make it more accurate and easier to use, but it still requires careful attention to detail.

  • Step 1: Enter Personal Information – Including anticipated filing status. This determines the standard deduction and tax rates used to figure your withholding.
  • Step 2: Multiple Jobs or Spouse Works – Complete if you have more than one job at a time, or if you are married filing jointly and your spouse also works. This step is crucial for accuracy if you have multiple sources of wage income.
  • Step 3: Claim Dependent & Other Credits – Complete if you have dependents and are eligible for the child tax credit or credit for other dependents. You can also include other credits here.
  • Step 4 (optional): Other Adjustments – Optional adjustments for other income (not from jobs), deductions other than the standard deduction, and any additional amount you want withheld from each paycheck.

When Should You Check or Update Your Withholding?

The IRS recommends checking your withholding at least annually, and whenever you experience a major life event or financial change, such as:

  • Marriage or divorce
  • Birth or adoption of a child
  • Purchase of a home
  • Retirement
  • Starting or stopping a second job
  • Significant changes in income or deductions
  • Changes in tax law that affect your situation

If your circumstances change and you need to adjust your withholding, you should submit a new Form W-4 to your employer as soon as possible!

Best Practices for Completing Form W-4

  1. Use IRS Tools: The IRS provides a Tax Withholding Estimator at IRS.gov/W4App to help you determine the correct amount of withholding. This tool is especially helpful if you have multiple jobs, non-wage income, or significant deductions or credits.
  2. Be Accurate and Complete: Fill out all applicable steps on Form W-4 and follow the instructions carefully.
  3. Review Annually: Even if your situation hasn’t changed, review your withholding each year to ensure it still matches your tax liability.
  4. Keep Records: Retain copies of your completed Form W-4 and any related worksheets.

Special Situations:

  • Multiple Jobs or Spouses Who Work: You are more likely to need to increase your withholding if you have more than one job or if your spouse also works. You can increase your withholding for one or more of the jobs or divide the additional amount between jobs as you wish.
  • Exemption from Withholding: You can claim exemption from withholding only if you had no tax liability last year and expect none this year. This exemption must be renewed each year by submitting a new Form W-4 by February 15th. Most working students do not earn enough money to owe tax and should claim “exempt” to avoid having to file an income tax return.

For more information, consult IRS Publication 505, Tax Withholding and Estimated Tax, or use the IRS Tax Withholding Estimator. If you have questions, your employer’s payroll department or KT tax professional can also provide guidance.