What the W-4 does
Form W-4 tells your employer how much federal income tax to take from each paycheck. Since 2020 it has no allowances. Instead it has five steps: your filing status (Step 1), a box for a second job or a working spouse (Step 2), credits for children and other dependents (Step 3), and adjustments for other income, deductions and extra withholding (Steps 4(a), 4(b) and 4(c)). Payroll runs those answers through the tables in IRS Publication 15-T.
The calculator does the same thing twice. First it works out what your current W-4 withholds over the year. Then it estimates the tax on your return, with the standard deduction of $16,100 (single) or $32,200 (married filing jointly), the brackets and credits. The gap between the two is your projected refund or bill. If it is more than a small amount, it suggests the Step 3 or Step 4(c) entry that closes it, rounded to whole dollars as you would write it on the form.
Four common situations
One job, nothing else. A single filer on $75,000 with a plain W-4 ends the year with a refund of about $0. The form is designed for this case, and no change is needed.
Side income. Add $12,000 of freelance income with no withholding and the same person ends with about $2,640 to pay. Entering $102 a paycheck in Step 4(c) brings it to a refund of about $12.
Children. A married couple with one income of $90,000 and two children under 17 who leave Step 3 blank end with a refund of about $4,400. The child tax credit is $2,200 per child, and entering it in Step 3 moves that money into the paychecks instead.
Two earners. When both spouses work, each employer withholds as if its paycheck were the household's only income, so both apply the full standard deduction and the lowest brackets. The couple ends up under-withheld. Checking Step 2 on both forms splits the brackets between the two jobs. A one-income couple on $130,000 shows the size of the effect: with Step 2 left blank they end with a refund of about $0; ticking the box as if there were a second job would give a refund of about $8,694, so leave it unticked when only one of you works.
What the inputs mean
- Salary, pay frequency and pre-tax deductions: what payroll withholds on.
- Children and other dependents: children under 17 for the child tax credit; other dependents for the smaller credit.
- Other income: income with no withholding, such as freelance work or interest.
- Step 2, Step 3 and Step 4(c) now: what your current form says, so the suggestion starts from it.
Common mistakes
- Checking Step 2 on only one of two jobs. The box splits the brackets between the jobs and works only when both forms have it checked.
- Claiming children on both spouses' forms. Put the Step 3 amount on one W-4, usually the higher-paying job's.
- Using an old form. Allowance-based W-4s from before 2020 still work for existing employees, but a new form is needed for any change.
W-4 questions
What should I put on my W-4 to get no refund and owe nothing?
Enter your real situation: filing status, children in Step 3, a second job in Step 2, other income in Step 4(a). If the result still leaves a refund or a bill, adjust Step 3 (to withhold less) or Step 4(c) (to withhold more). For a single filer on $75,000 with $12,000 of untaxed side income, the calculator suggests $102 a paycheck in Step 4(c).
Should I claim exempt?
Only if you owed no federal income tax last year and expect to owe none this year. Claiming exempt stops all federal withholding; if you turn out to owe, the whole bill arrives in April, possibly with a penalty. An exempt W-4 also expires each February unless you file a new one.
How often can I change my W-4?
As often as you like. Most employers apply a new form from the next payroll they run. It is worth a fresh look after marriage, a new child, a second job, a big raise, or a refund or bill much larger than you expected.
Sources
Rules checked . How we calculate.