How to Calculate W4 Allowances
The employee's W4 form helps the employer figure the amount of federal income tax to withhold from her paycheck. The IRS requires employers to give new hires -- and employees who want to change their withholding conditions -- a W4 to complete. The employee's federal income tax withholding largely depends on the number of allowances she claims on her W4.
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Identification
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The employee can claim allowances on the W4 if he meets the IRS qualifications. For tax year 2010, for example, he can claim an allowance for himself; for certain filing statuses, such as head of household or if he's single with one job; for his spouse; his dependents; dependent or child care expenses; and child tax credit. The employee completes lines A through G of the W4 to claim allowances. He writes the total amount claimed on line H. He also puts this total on line 5, toward the bottom of the W4 -- he gives this part to his employer.
Effects
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The IRS gives a specific sum for each allowance, which lowers taxable wages. Therefore, the more allowances the employee claims, the less federal income tax she's likely to pay. Similarly, the fewer allowances she claims, the more federal income tax she pays. Claiming too many allowances can cause her to owe the IRS when she files the tax return. Claiming too little can result in her overpaying federal income tax and having to wait until after she files the tax return for a refund.
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Allowance Calculation
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The employer calculates allowances according to the rate the IRS sets, as shown on page 37 of the IRS 2010 Circular E. For 2010, the IRS gives $3,650 for one allowance annually. Therefore, one allowance for a weekly payroll is $70.19 ($3,650 / 52 pay periods); a biweekly payroll gives $140.38 ($3,650 / 26 pay periods); a semimonthly payroll gives $152.08 ($3,650 / 24 pay periods); and a monthly payroll gives $304.17 ($3,650 / 12 pay periods). The employer multiplies the amount granted for each allowance by the total allowances claimed to arrive at the total allowances amount. If a biweekly employee claims three allowances on his W4, the calculation would be: $140.38 x 3 allowances = $421.14.
Withholding Determination
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The employer subtracts the total allowances amount from the employee's gross wages to arrive at the amount subject to taxation. It then uses the Circular E's percentage method table (as shown on page 39 of the 2010 Circular E) specific to the employee's filing status, wages subject to taxation and pay period to figure the withholding amount.
Considerations
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The employer can use the Circular E's wage bracket method if the employee's wages fall into the wage bracket's income limit and if the employee claims less than 10 allowances. This method takes less effort than the percentage method because it gives the precise amount of tax to withhold based on the employee's filing status, pay period, allowances and income.
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References
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