If you've ever started a new job, you're familiar with the process of completing your W-4 form. That's the IRS document your employer requires you to complete so they can determine the proper amount of income tax to withhold from your pay. Get it right, and you get a nice refund at tax time. But get it wrong, and you may end up owing tax – plus penalties and interest.
How to complete your W-4 is even more important in 2018. Since we had a major tax reform beginning on January 1 of this year, the outcome can be a little bit different than it has been in the past.
W-4 Basics: 2018 Edition
The Form W-4 for 2018 is already in print and available from the IRS. Your employer should have it available, but if not, don't be afraid to ask to complete the one specifically for 2018. It'll avoid any unpleasant surprises at tax time.
In looking at the form, you can see that it's pretty simple. You just have to fill out a few lines of information. The general information requested in the first four lines includes:
- Line 1, Your full name and address
- Line 2, Your Social Security number
- Line 3, Marital status
- Line 4, complete only if your last name is different from what's on your Social Security card
Lines 5 through 7 are where you need to include the information that really matters. Because it's the “nuts and bolts” of form W-4, we'll cover Line 5 in the next section. But let's take a quick look at Lines 6 and 7.
Line 6. This is where you will claim an additional dollar amount you want withheld. This can be because you expect a significant amount of income from an unusual source. That could be taxable alimony, or an extra amount you want withheld to cover taxes on a side business or expected investment income.
Line 7. This is where you indicate that you want no income tax withheld. This could be because you earn below the amount that would be taxable. For 2018, this is $12,000 if you are single, and $24,000 of you're married filing jointly.
Completing Line 5: Total allowances
This is where completing the W-4 becomes interesting.
To complete Line 5 you first have to complete the Personal Allowances Worksheet.
In completing the worksheet, you'll come up with a number of exemptions to enter on the W-4 itself. Here's what the sheet looks like.
Let's go through it line by line:
- Line A, this one's easy – Just enter 1 for yourself.
- Line B, enter another 1 if you're married filing jointly.
- Line C, enter 1 if you file as head of household (you're single, but with one or more eligible dependents)
- Line D, enter 1 only if one of the three conditions listed apply.
- Line E, if you're eligible for the child tax credit, and you fit within one of the first three income ranges listed, this can be an important source of allowances. You can enter multiple allowances for each eligible child, in the first two income brackets.
- Line F, here you can claim allowances for other dependents, which could be a parent or other relation who qualifies as a dependent under IRS regulations.
- Line G, this line directs you to “Worksheet 1-6 of Publication 505”. Since you probably have neither the time nor the inclination to take on this research project, it's best to enter 0. If you have a tax preparer, you might want to consult with him or her as to the best approach to completing this line. Otherwise, 0 is the safe choice.
You'll total your allowances on Line H. You'll then be asked three questions, the first two of which will direct you to two additional worksheets. If neither apply, you can simply enter the number of allowances from Line H to Line 5 of the actual W-4, and call it a day!
Deductions, Adjustments, and Additional Income Worksheet
You'll complete this worksheet if you expect to itemize deductions on your tax return, claim certain adjustments to your income, or have a lot of non-wage income.
This worksheet is more complicated than the others, because you have to be making some projections. For example, in Line 1, they're asking you to estimate what your deductions will be for 2018. The best way to do this is the check your total deductions on your 2017 1040 Schedule A. But they will only apply if they exceed the three dollar thresholds listed on Line 2. If they don't, you enter 0 on Line 3. (Note: The thresholds to itemize deductions is higher in 2018 and subsequent years, so you may not be able to itemize even if you have in the past.)
Line 4 is your adjustments to income, as well as any standard deduction for age or blindness. Again, you'll need to get these either from your tax preparer or from your 2017 1040. They may include adjustments like alimony paid, an IRA deduction, deductions for half the self-employment tax you paid, or self-employed health insurance premiums.
Line 5 is the totals from Lines 3 and 4.
Line 6 is where you begin entering additions to income, particularly investment income, like dividends, interest, capital gains and similar sources.
On Line 7 you deduct the number on Line 6 from Line 5.
On line 8, you then have to divide the total number on Line 7 by $4,150. For example, if that total is $9,500, dividing it by $4,150 gives you 2.29, which you will round down to 2.
You will add any exemptions from Line H of the Personal Allowance Worksheet, then add Lines 8 and 9 on Line 10. You can then transfer this number to Line 5 of your W-4.
But if you plan to use the Two-Earners/Multiple Jobs Worksheet, you'll need to complete one more step…
Two-Earners/Multiple Jobs Worksheet
This worksheet will need to be completed only if you have two jobs or if you're married and your spouse has a job.
This often results in a higher tax liability and this worksheet provides an opportunity to have additional withholding to cover it.
There's no shortcut to this worksheet. You'll have to enter the information requested on each line, which will be provided elsewhere in your calculations. For example, on Line 1, you'll enter information you've already calculated from the Personal Allowances Worksheet or the Deductions, Adjustments, and Additional Income Worksheet.
One Line 2, you'll enter the number in Table 1 at the bottom of the worksheet, that applies to the lowest paying job. But if you're married filing jointly, and you exceed the numbers listed on that line, you cannot enter more than 3.
You'll then subtract Line 2 from Line 1. In most cases, this will reduce the number of allowances you'll be able to claim on Line 5 of your W4.
If the net number is less than 0, you'll have to work out increasing your withholding using lines 4 through 9. You'll then be directed to entering the dollar amount from Table 2 on Line 7. By multiplying the amount on Line 7 by Line 6, you'll enter the dollar amount on Line 8 that will tell you how much additional withholding you'll need.
On Line 9 you'll divide the dollar amount on Line 8 by the number of pay periods remaining in the year. For example, if there are 26 weeks remaining in the year, and you're paid every two weeks, you'll enter 13. The net result will be moved to W-4 Line 6, and will represent the additional tax to be withheld from your regular paycheck.
Final Thoughts on How to Complete Your W-4
For most people, completing the W-4 won't be that complicated, because you won't be required to go through all the additional worksheets. But if it seems a bit overwhelming, it might be best to get your tax preparer or accountant involved in the process. A W-4 shouldn't take more than a few minutes to complete. If it does, it's an indication to get outside assistance from a professional.