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Updating Your W-4 Form: When and Why?

October 26, 2015 | posted by Abacus Payroll
Abacus Payroll W-4 Form

The IRS W-4 Form tells an employer how much to withhold from each paycheck to pay your taxes each Tax Day. You can adjust this amount, which can increase or reduce the amount of a refund you receive the following year.

IRS W-4 Forms tell employers how much in taxes to withhold from employees’ paychecks based on the number of allowances they claim. Officially, a W-4 Form is an Employee’s Withholding Allowance Certificate. New employees must fill out a W-4 Form, for federal and state, before beginning employment. Knowing when and why to update your W-4 Form lets you take control of your individual tax liability.


Taxes and Why Updating Matters


Allowances directly affect whether an employee owes taxes, gets a tax refund, or comes out roughly even. The more allowances taken on Form W-4, the less federal tax is withheld from each paycheck. Be careful though, because if an employee claims too many allowances, that refund check either goes out the window and can result in a tax bill owed on April 15.

An accurate W-4 Form is vital. There are three things that can result in a penalty:

1. Paying less than 90 percent of yearly tax liability.
2. Owing more than $1000.
3. Paying less than 100 percent of the previous year’s total tax bill.

Your claimed allowances are mostly up to personal preference. Too few and your paychecks will be smaller than they need to be, while giving Uncle Sam an interest-free loan. That’s not bad if you want a large lump-sum refund. But if you would prefer to keep more money in your pocket throughout the year, the number of allowances should get you as close as possible to zero taxes, zero refund.

Try Abacus Payroll’s Form W4 Assistant paycheck calculator


Life Situations to Update W-4 Form: Multiple Jobs


Picking up a second job usually increases your income and therefore your tax liability. It also means updating your W-4 Form to keep your taxes payable on your terms — as long as you follow the tax laws, that is. This is also applicable if your spouse gets a new or second job that causes your joint income to increase.

If you are freelancing or starting a home business, you may want to adjust the W-4 Form for your main job to maximize your tax position. If your second job is with an employer, you’ll fill out a new W-4 for that income, but the added earnings can affect how many allowances to claim for your main gig, too. A higher income might mean a higher tax bracket.


Life Situations to Update W-4 Form: Change in Filing Status and Dependents


A prime time to adjust your Form W-4 is when newlyweds return from their honeymoon. Taxes may not be top of mind, but as long as you were married before December 31, you will be eligible to file jointly and likely qualify for other deductions and a lower tax rate. Likewise, if you went through a divorce within the year, you may now be filing as single status which would reverse some of the tax benefits you previously received.

Another major tax event that should be accounted for in your Form W-4 is the birth or adoption of a child. Especially if you qualify for Child or Child Care Tax credits, you will want to adjust your withholding allowances accordingly.


How Often Can a W-4 Be Updated?


Per IRS recommendations, you should update your W-4 Form every year. If your life situation changes in a way that impacts taxes, update your W-4 as often as necessary. Your W-4 should reflect your current life and financial situations — regardless of the time of year.

Pretend you get married in February, start moonlighting in April, and have a baby in November. When should you have updated your W-4? Ideally, in February, in April, and in November. The first two changes might bump up your tax liability since a combined or higher income can push you into a higher tax bracket. The last at least puts a little more money (back) in your pocket.


Employer Responsibilities


Your employer must put your updated W-4 into effect at the beginning of the first payroll period that ends on or after the 30th day from the date you turned it in. Employers can, however, apply it earlier at their own discretion.


Abacus Payroll specialists and Alloy Silverstein CPAs can discuss with you your optimal Form W-4 and state tax withholdings that best fit your individual situation. Contact us today at (856)667-6225 or fill out our quick Contact Us Form.

About the Author: Abacus Payroll

Abacus Payroll, Inc. is a leading provider of payroll solutions for businesses of all sizes. Whether yours is a family-owned small business or a national corporation, we provide payroll, tax and other financial services on time and at an affordable price. Unlike other payroll providers, Abacus Payroll will assign your very own payroll specialist who will understand your payroll needs inside and out. So no more speaking to a different person each time, no more sitting on hold for hours and most importantly no more missed deadlines! Contact us today to see how we can help your business. You can count on us.