Withholding Allowance on the W-4
Taxes on earned income are actually due as you generate a salary. To avoid the paperwork and hassle of having millions of individual Americans paying taxes directly multiple times per year, the IRS has employers collect the taxes for transmission instead. When you go to work for a new employer, you are required to complete a form W-4, Employee's Withholding Allowance Certificate. The information on the W-4 helps employers determine the amount of taxes to withhold from each paycheck for transmission to the IRS.
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Number
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In general, you should claim one withholding allowance per member of your family. For example, if you have a spouse and two children, your total withholdings would be four, including yourself. However, certain factors can affect the number of withholdings you would claim. For example, if you are the head of the household and have three children, you could take five withholdings -- one for each of your children, one for yourself and one for your status as head of household.
Publication 919
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Consider adjusting your withholding amounts if you end up with a large tax refund after filing taxes. Similarly, if you owe a large tax payment, or you owed so much that the IRS imposed a penalty on top of the amount you owed, there are too many withholdings on your W-4. You can use Publication 919, available on the IRS website, to calculate your withholdings before you complete a Form W-4.
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Adjustment
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You can adjust your W-4 any time throughout the year, for any reason. If you have determined your typical withholding levels are too high, leading to a large refund, and would prefer to have some of that money available in each paycheck instead, you can adjust your withholdings by adding another. Or if you are also self-employed, or have a second job that doesn't deduct taxes, consider removing one or two withholdings, to ensure you have paid sufficient taxes at the end of the year. Alternatively, self-employed or independent contractors can also file quarterly tax reports.
Credits
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You can also adjust your withholding numbers downward to account for expected tax credits, like Earned Income Credit, the Alternative Child Tax Credit or the Lifetime Learning Credit. Use the personal allowance worksheet in publication 919 to determine how to adjust your withholdings to account for credits. You may be exempt from all withholdings, depending on your circumstances. If you earn less than $950 per year, you will usually be exempt. However, if you can be claimed as another person's dependent, you can't take exempt status, even if you would otherwise qualify.
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