W-4 Withholding: How to Fill Out Form W-4 Correctly

Every new job comes with Form W-4, the Employee's Withholding Certificate. It tells your employer how much federal income tax to withhold from each paycheck. Fill it out carefully and your withholding should come close to your actual tax. Fill it out carelessly and you may face a large bill and possible penalty in April, or give the government an interest-free loan all year. This guide walks through W-4 withholding step by step, including two-earner households and side income.

How the Current Form W-4 Works

The IRS redesigned Form W-4 for 2020 and later. The old system of withholding allowances is gone. Instead, the form asks direct questions about your filing status, other jobs, dependents and other income or deductions. If you only fill out Step 1 and sign Step 5, your employer withholds as if you are single or married filing jointly with one job and the standard deduction, according to the status you check.

Employees hired before 2020 who never submitted a new form can continue under their old W-4, but any change requires using the current form.

Step 1: Personal Information and Filing Status

Enter your name, address and Social Security number, and check the filing status you expect to use: single or married filing separately, married filing jointly or qualifying surviving spouse, or head of household. Choose head of household only if you meet the rules, which our head of household guide explains.

Step 2: Multiple Jobs or Spouse Works

Complete this step if you hold more than one job at the same time or if you are married filing jointly and your spouse also works. Without it, each employer withholds as if that job is your only income, which often leads to under-withholding because combined income pushes you into higher brackets.

You have three options:

• Use the IRS Tax Withholding Estimator online, which gives the most accurate result, and enter the recommended extra amount in Step 4(c).
• Use the Multiple Jobs Worksheet on the form.
• Check the box in Step 2(c) on the W-4 for each job if there are only two jobs total with similar pay. This option is simple but tends to be less precise.

Complete Steps 3 through 4(b) on only one W-4, usually for the highest-paying job, to avoid double-counting.

Step 3: Claim Dependents

If your income is under the limits listed on the form, multiply the number of qualifying children under 17 by the per-child amount shown on the current form, and multiply other dependents by the amount shown for them. Add the totals. This reduces your withholding to reflect the child tax credit and the credit for other dependents. Check the current year's form, because amounts change with tax law.

Step 4: Other Adjustments

4(a) Other Income

Enter income not from jobs that will not have withholding, such as interest, dividends and retirement income. Interest from savings and Treasury bills counts here. Self-employment income can be included, though many self-employed people make estimated payments instead.

4(b) Deductions

If you expect to itemize or claim certain deductions beyond the standard deduction, use the Deductions Worksheet and enter the result here to reduce withholding.

4(c) Extra Withholding

Enter any additional amount you want withheld each pay period. This is the simplest way to cover side income, a spouse's earnings or a past underpayment.

Step 5: Sign and Date

Your W-4 is not valid until you sign it. Give it to your employer, not the IRS.

Claiming Exempt

You can claim exemption from withholding only if you had no federal income tax liability last year and expect none this year. An exempt status expires and must be renewed by submitting a new W-4 by February 15 of the following year, or your employer must withhold as if you are single with no adjustments.

When to Update Your W-4

Review your withholding when:

• You marry, divorce or have a child.
• You or your spouse start or stop a job.
• You begin a side business or earn significant investment income.
• Tax laws change in ways that affect you.
• You received a large refund or owed a significant amount last year.

Avoiding the Underpayment Penalty

The IRS may charge a penalty if you do not pay enough tax during the year through withholding or estimated payments. Generally, you avoid the penalty if you owe less than $1,000 after withholding and credits, or if you paid at least 90 percent of the current year's tax or 100 percent of the prior year's tax, rising to 110 percent if your prior-year adjusted gross income exceeded $150,000, or $75,000 if married filing separately.

Withholding is treated as paid evenly throughout the year, so increasing withholding late in the year can help fix an underpayment in a way estimated payments cannot.

Big Refund or Bigger Paycheck?

A large refund means you overpaid during the year. Some people like refunds as forced savings, but adjusting your W-4 could put that money in your paycheck, where it might earn interest in a high-yield savings account or pay down debt. Aim for a modest refund or small balance due.

Self-Employed and Business Owners

If you also run a side business, you can either raise withholding on your W-2 job using Step 4(c) or make quarterly estimated payments. Our guide to an LLC vs sole proprietorship covers how business income is taxed.

The Bottom Line

The W-4 controls how much federal tax comes out of each paycheck. Choose the right filing status, account for multiple jobs and a working spouse, claim dependents and adjust for other income or deductions. Use the IRS Tax Withholding Estimator for accuracy, and review your W-4 after major life changes to avoid surprises at tax time.