W-4

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You've matched, people keep telling you that you are amazing, life is good. Then your new residency program sends you hundreds of forms to fill out. Included is a "W-4" but what the heck is a "W-4"?

Before you start any job as an employee, you will need to fill out a "W-4" form and return it to your employer. You can't get paid without it. The form's purpose is to provide some basic financial and family information so that your employer can "withhold" the appropriate amount of taxes from your paycheck each pay period and send it to the IRS and state.

[Note, that the 2018 W-4 has been slightly modified to reflect the new tax law, the instructions on this page still apply.]

 

W-4 Curbside Consult

As with all curbside consults, you rely on this information at your own risk!

If you only have 30 seconds to research, fill-out, and submit your W-4, simply pick your corresponding situation and fill out the form as instructed below.

Your employer only needs the bottom of Page 1 of the W-4. They don’t need any other part, and your employer does not need to “see your work” or check your math. But please come back and do some additional reading after your job starts, to ensure you get it "right".

 
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Single, one job making less than $130,000:

Choose “single” and put “1” allowance on line 5.

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Married, only one spouse with one job making less than $180,000:

Choose married, and put “2” allowances on line 5.

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Single with two jobs, or Married, each with a job? Make more than $130,000 single or $180,000 married? Have children?

No curbside consult for you! Keep reading below for more info.

More Complicated Situations

If you have multiple jobs, started a job mid-year, are a high-earner, or have some other “complicated” situation and you are not interested in learning about Form W-4, how withholding works, or manually computing your own W-4 using the worksheet, then you can use the IRS’s withholding calculator and use the results to prepare your W-4. Use the time you didn’t use to learn about W-4s to continue complaining about how much you hate your clinic’s choice of an electronic medical record.

If you would like to further educate yourself about taxes and personal finance so that you take control of your and your family’s financial life rather than entirely outsourcing it to tax preparers, unscrupulous financial planners, and hospital bureaucrats (to whom you are just one tiny cog in their large set of wheels) then read on!

 

The Basics

 

For maximum benefit, you should print out a copy of the W-4 or have it open in an adjacent browser window.

 

What is a W-4?

A W-4 is a document you are required to provide your employer, which then allows your employer to calculate how much federal income tax to withhold from each of your paychecks. States also have analogous forms which go by various names for state income tax withholding.

 

What is tax withholding?

Our tax system is a “pay as you go” system. You cannot simply wait until the end of the year to calculate your tax due and pay at the end, like a restaurant bill. You are supposed to pay along the way.

If one does not pay the IRS appropriately throughout the year (via tax withholding and/or “estimated tax payments” if applicable) there is a possibility of penalties and interest for under-withholding.

 

The IRS treats the total year-end withholding from your pay AS-IF it was evenly withheld throughout the year. This means you can increase your withholding during the later parts of the year to make up for under-withholding earlier in the year. This is one way to avoid possible penalties if you find you have under-withheld during the year. Also, there are several “safe harbor” rules which allow you to avoid penalties (but not tax!) in many common situations which lead to under-withholding.

How does my employer use the W-4?

Employers use one of several IRS-allowed tables or formulas which calculates the amount of tax to be withheld from each paycheck, which is a function of your compensation and the “allowances” you claim on the W-4 you provide to them.

They essentially use a look-up table based on marital status, salary, and allowances which then spits out a dollar amount. This amount is then sent to the IRS each pay period, and represents money you pay towards the overall tax due to the IRS. Your actual tax due does not get officially calculated until you file and submit your taxes at the end of the year.

Note: The various methods employers use to calculate your withholding affect the amount withheld. Even with identical salary and an identical W-4, two different employers may withhold different amounts. This is another reminder that the amount withheld from your pay is merely an estimate of your tax. However, they should be close. Use this tool to see how much will be taken our of your pay based on the most common method used.

 

What is the relationship between my W-4, the taxes withheld from my paycheck, and my total tax due to the IRS?

Keep in mind that your employer knows very little about your tax situation (e.g. marital status, other income, deductions, etc). All they know is your compensation. In our system, employers are required to withhold tax from your pay based on information you provide them via the W-4.

It is your responsibility to determine the correct withholding and calculate and pay your tax. The W-4 form is designed to help you help your employer “get it close”.

A common complaint whenever there is a large tax bill due in April is “they” didn’t withhold enough tax from the paycheck. The “they” in this case is “you”. 

There are even instructions on the W-4 form which say “after your form W-4 takes effect” to double check that your withholding will accurately reflect your tax liability when ultimately filing your taxes.

Note, we have a calculator which will show you exactly how much federal income tax will be taken out of each paycheck, based on the number of allowances you put on your W-4.

 

Do not confuse your tax refund or amount due when you file with your total tax. If you get a big refund, it was because you overpaid during the year. Likewise, a large amount due is because of underpayment. Several things can cause your previously correct withholding to get off kilter and lead to an "April Surprise" (good or bad): Job change, adding/losing side jobs (especially a non-W2 job!), getting married or divorced, having a child.

What is an “allowance”?

A personal allowance (as entered on line 5 of the W-4) is the term used to designate how much tax you are “allowed” not to have withheld. The more allowances, the less the withholding.

Note that allowances are related to, but can be very different from the “exemptions” you can claim on your 1040 when you file. You can claim as many allowances on the W-4 as apply to your situation as per the form instructions. You can even claim more allowances than you legitimately have as long as you are not doing so in order to avoid having appropriate tax withheld.

For example, if you withheld more than needed earlier in the year, or perhaps made voluntary estimated payments, you can fill out a new W-4 with more allowances than “allowed” to titrate withholding to your desired endpoint.

 

What are some common mistakes made when filling out the W-4?

By far the most common is when a married couple with two jobs, or anyone with more than one job fails to read the instructions and therefore does not complete the “two-earner” worksheet on the 2nd page.

People typically complete lines A-H on the third page (the personal allowances worksheet) and then use this result to fill in their allowances on the form (line 5). But you’ll note that the instructions on page 1 also direct you to consider either or both the “deductions and exemptions” worksheet or “Two-Earners/Multiple Jobs” worksheet. 

Note that choosing “single” and claiming “zero” allowances is not the “maximum” withholding. There are many times this will lead to under withholding. See the question on “additional amount” further below.

 

How do I know if I need to use the “Deductions and Adjustments” worksheet?

This can be tricky. Because first you must estimate your itemized deductions for this year and/or next. In a sense, you need to do your taxes before you do your taxes.

And for many people reading, this is their first job or have never filed their own taxes, and thus may have no idea whether they will itemize or not, or even what itemizing means or entails. In addition, for high earners, there are “phaseouts” of itemized deductions to worry about.

Most people (incorrectly) ignore this worksheet, and just keep their fingers crossed. But as long as you are here learning about W-4s, this is a good time to go to learn about other tax-related issues, such as itemized vs. standard deductions.

 

What is the purpose of the “additional amount” (line 6)?

This line is necessary because high earners or those with more than one job in the family will not have enough tax withheld even when claiming “zero” allowances. Thus, this box allows one to add an extra dollar amount to the withholding (on top of whatever is otherwise calculated based on marital status and allowances).

The two-earner/multiple job worksheet will tell you exactly what to put on this line, if needed. Alternately, line 6 is an easy way to pay tax for other jobs or work for which you don’t or can’t have tax withheld, and which would otherwise require paying quarterly estimated taxes. See the page on side jobs, moonlighting, and other self-employment situations.

 

How do I know if I have filled the W-4 out correctly?

 

First, you certainly want to avoid under-payment penalties and interest. That’s goal #1. Second, even if you avoid penalties, you don’t necessarily want to be surprised by a big tax bill when you file that you weren't expecting. In both cases, you must have some idea of what your total taxes will be by the end of the year. Please see the page on the “Safe Harbor” from underpayment penalties for more information.

Basically, after you have at least one full pay period, your paystub will show the withholding per pay period, which will allow you to calculate your eventual withholding for the entire year. But whether that amount is sufficient (or excessive) requires you to have some idea of what your tax due will actually be.

In many cases, you can use the previous year’s taxes as an estimate, or you can use tax software (or paper and pencil!) from the previous year and enter this year’s information, and you should get a very good approximation of your total tax due (and thus whether your withholding will cover it).

 

Does the W-4 have to be “correct” or specific to that employer?

No. The IRS doesn’t require a W-4 to have any particular entries. All they care about is whether, by the end of the year, your combined withholding and/or estimated payments (and your spouse’s if applicable) were sufficient to avoid penalties and interest on underpaid tax.

For example, you can fill out one W-4 with “additional amounts” which leads to enough withholding for all your jobs combined, while the W-4s in those other jobs are filled out in such a way to have little or nothing withheld. In theory, you could make quarterly estimated payments directly and not have any tax withheld from your job.

But in some extreme cases this may lead to questions (but ultimately no problems) from the IRS, because manipulating withholding is one method some people use to avoid paying tax they legally owe.

Note: It used to be that employers were required to send W-4s to the IRS if more than a certain number of allowances were selected, in order to screen for those who were attempting to avoid tax. This is no longer the case and the IRS does not get copies of W-4s unless they request them.

 

What about bonuses?

It is a common misconception that bonus income is taxed at a different rate than the normal salary.  But this is not true. The ultimate tax due on the bonus is identical to the other compensation. (e.g. whether one has a salary of $10,000 and a bonus of $90,000, or the other way around, will result in the same total tax due to the IRS)

This myth persists because the withholding on bonuses follows a different set of rules from your regular salary (where withholding depends on the W-4).  It's common to have a fixed 25% withheld from your bonus. Depending on the tax bracket you end up in at the end of the year, this 25% withholding may be more or less than the ultimate tax due on this bonus amount.

For example, high earners in the 33% tax bracket will have to pay additional tax than expected when they file. Those in a 10% or 15% bracket will get a bigger than expected refund. So high-earners with a bonus often end up owing more than they expected when they file their taxes (because the 25% withholding on bonuses was insufficient to cover the tax), which leads to the misunderstanding that bonus income is taxed more than regular income.

 

Curbside Consult and official instructions differ.

 

For most, the suggestions in the “Consult” result in putting one less allowance compared to the official instructions. Our suggestion results in slightly more tax withheld, and will likely result in a small refund. But following the official instructions typically results in a small amount due.

We assumed that those who are relying on the “Curbside Consult” are most likely new taxpayers with first-time jobs (e.g. new medical residents), and probably do not have any idea what their overall after-tax income (and thus their overall budget) will be.

So we assumed it would be better to ensure taxes were fully accounted for with withholding, to prevent a situation where there was tax due which one could not pay. However, we can see this potentially resulting in problems for some.

For example, if your first job starts mid-year (such as most graduating medical students), taxes will be over-withheld anyway because the withholding is based on a full-year salary rather than a half-year salary. So there is likely to be a large refund in the first year regardless. If you assume that next year's refund will again be large, you might overspend during the year in anticipation of a “bonus” of sorts when filing the next spring.

 

More questions?

Wow, you read all the way to the end! We are impressed. One last note about W-4's: READ THE INSTRUCTIONS! The IRS really does try to make it understandable.

If you still have questions after all of that, let us know! We really will respond and try to help as best we can.