About Witholdings on a W4
Some of the taxes deducted from an employee's paycheck are set percentages of gross pay--like 6.2 percent for Social Security. Federal--and most state--income taxes only touch part of the employee's pay. How much is taken out depends on the number of withholding allowances claimed on the W4 form. It's important to understand withholdings so the correct amount of tax is deducted.
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Identification
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The W4 is the IRS form used to determine an employee's filing status and withholding allowances--money that is subtracted from gross pay before federal income tax is calculated. The more withholding allowances a person is entitled to, the less his income will be taxed. The W4 serves as a way to estimate tax owed so you won't have to pay a large amount on April 15.
Significance
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Filling out the W4 requires the use of IRS Publication 15 (Circular E) for the current year. It provides the amount for each withholding allowance for a person's filing status. That amount is multiplied by the number of allowances and subtracted from the employee's gross pay before taxes are calculated. For example, in 2008, the withholding allowance for a single person paid weekly was $67.61. If a single person has two withholding allowances and makes $500 for the week, the amount to be taxed will be $500 minus 2 times 67.61 ($135.22), or $364.78.
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Function
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To fill out a W4, the employee must have a government-issued photo ID (driver's license, state or military ID, etc.) and a Social Security card. Use the W4 form worksheets to determine how many withholding allowances to claim. The filing status (single or married) is entered on Line 3. Enter the total number of allowances on line 5. If you are exempt from taxes, write "exempt" on line 7. Ensure that personal information is correct and sign the W4.
Features
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Generally, you can claim yourself unless you are claimed as a dependent by someone else. Enter the correct number of withholding allowances. The IRS can levy a fine if you intentionally overstate how many allowances you are entitled to claim.
Considerations
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Some people have a second job or untaxed income. An employer does not take this into account when calculating the tax to be withheld. However, you can avoid owing a large amount of tax by requesting an additional sum be withheld from your check each payday. Some people do this as a way of getting a large refund each year, but that's actually a bad idea. The IRS does not pay interest on excess tax withheld. You are better off having that sum automatically transferred from your checking account into a savings or money market account, where it will earn interest.
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