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.

There is a brand new W-4 for 2020.

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

Form W-4 has been completely changed for 2020. And so this “curbside consult” which used to be necessary to simplify the instructions, is unnecessary. If you have no children or non-salary income, all you need to do is complete Steps 1 and 2 and then stop.

More Complicated Situations

If you have multiple jobs with dissimilar salaries, started a job mid-year, or have some other “complicated” situation then you should learn to use the can use the IRS’s withholding calculator and use the results to prepare your W-4, or alternately closely follow all the directions listed on Page 2.

And 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!

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.

How does my employer use the W-4?

Employers use your W-4 to calculate the amount of tax to be withheld from each paycheck, which is a function of your compensation and the other information you provide to them on your W-4.

They essentially use a look-up table based on marital status and salary, 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: You can use this tool to see how much will be taken out 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) unless you provide it accurately via your W-4. All they know is your compensation. In our U.S. tax 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 and you can use this to help figure out if your withholding will be appropriate for your needs. Like Goldilocks, you don’t want your withholding to be too low, or too high.

What is an “allowance”?

Good news! The concept of “allowances” disappeared for 2020. We just got to delete several (very nicely written) paragraphs in this section.

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 Page 3.

How do I know if I need to complete “Step 4” (other adjustments)?

This can be tricky.

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.

It’s out of scope for this page to go into detail here. But remember that you can always use the IRS’s online tool which will tell you exactly how to fill out your W-4.

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.

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 employers typically use a different set of withholding for bonuses vs regular salary. For example, employers usually withhold a fixed 22% (for federal taxes) from bonus wages (which are also referred to as supplemental wages). Depending on the tax bracket you end up in at the end of the year, this 22% withholding may be more or less than the tax that this bonus income contributed to your overall taxes.

For example, high earners can be in a 32% or higher bracket, and thus 22% is insufficient withholding, and they 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 22% withholding on bonuses was insufficient to cover the tax), which leads to the misunderstanding that bonus income is taxed more than regular income.

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.