- The purpose of the withholdings on your W-4 form is to give the employer a number to be used in the formula to calculate the amount of taxes to be withheld from your paycheck. This number represents the number of "allowances" you are claiming which correlate, but not directly, to the deductions you intend to take on your tax return. This form puts the responsibility for this number on the employee instead of the employer.
- The higher the number listed, the lower the amount to be withheld from the employee's paycheck. This is supposed to be related to the number or amount of deductions the employee will take when they file taxes. However, there is no way to anticipate every filing situation, so there is some leeway for establishing the proper number.
- The W-4 form can be changed at any time by the employee subject to employer rules which are limited by law in how restrictive they can be. An employee could theoretically change their W-4 several times during the year. If the employee does not change their W-4 form, then it remains in effect until employment is terminated or the employee does change the form.
- Claiming too many allowances will cause too little money to be withheld from your paycheck. While this sounds great on the surface, there are hefty penalties for under withholding over the course of the year, so caution needs to be taken with the number. The IRS provides a W-4 Withholding Calculator on their website to help make a more accurate calculation than the worksheet on the form provides.
- If a taxpayer is married and filing jointly, and one spouse makes more than the other spouse, it will be necessary for the spouse who makes less money to have their withholding increased above what the worksheet shows. This is because the employer will calculate the spouse's withholdings based only on their earnings which may be in a lower tax bracket. This will cause the wrong percentage to be used. For example, a spouse making $80,000 and another making $30,000 will have too little taxes withheld from the lessor paid spouse because although the overall family tax bracket will be based on $110,000 the employer will withhold as if the spouse is in the $30,000 tax bracket.
- The standard W-4 calculation involves listing one allowance for yourself (if no one else claims you--applies primarily to young workers whose parents will claim them) and one for a spouse. An additional one is added if only one spouse works or you are single. Then, another allowance is added for each dependent. Another one is added if the taxpayer will claim at least $1,500 worth of child care expenses. Another is added if filing as Head of Household. Additional allowances may be added based on income an a supplemental worksheet.
- With careful management, the allowances on a W-4 can be adjusted to meet a person's cash flow needs. For example, an employee who calculates that 7 withholdings is the "right" number could set their withholdings at 7 in January. When it is time to go on summer vacation the employee could change the number to 5 for May and June and then back to 8 (to make up the difference). Then, if the employee determines that there will be plenty of money withheld they could change it back to 5 for December to help with Christmas spending.
