w-4

One of the most common questions I get is: “How many deductions should I take on my W-4?” The truth is, the IRS no longer uses “allowances” on the W-4 form. This changed in 2020, when the IRS redesigned the W-4 to make withholding calculations more accurate and easier to understand. Instead of allowances, the form now asks for specific income amounts, deductions, and credits to determine the right withholding. Here’s how to navigate these changes and ensure you’re withholding the right amount.

Step 1: Why the W-4 Changed

Before 2020, the W-4 form used allowances to determine how much tax to withhold. The more allowances you claimed, the less tax was withheld, and the fewer allowances, the more tax was withheld. However, this system often led to confusion and incorrect withholdings.

The change was driven by the 2017 Tax Cuts and Jobs Act (TCJA), which eliminated personal exemptions. Since allowances were tied to personal exemptions, they were no longer relevant, and the IRS needed a new approach. The new W-4 form now asks for specific financial details instead of an arbitrary number of allowances, making it easier to withhold the correct amount.

Step 2: Who Has to Fill Out a W-4?

Employees must fill out Form W-4, Employee’s Withholding Certificate, to determine how much federal income tax should be withheld from their paycheck. The following groups need to complete a W-4:

• New Employees: Anyone starting a new job must fill out a W-4 so their employer knows how much tax to withhold. If you don’t submit a W-4, the employer will default to withholding at the “single with no adjustments” rate, which may result in higher withholding.
• Employees Adjusting Withholding: If you owed a large tax bill last year or received a big refund, you may want to update your W-4 to better match your tax liability.
• People Experiencing Life Changes: If you marry, divorce, have a child, or buy a home, your tax situation changes, and updating your W-4 ensures the correct withholding.
• Employees with Multiple Jobs or a Working Spouse: The W-4 includes a section to help prevent under- or over-withholding for those with more than one income source.
• Employees with Additional Income: If you earn side income (freelancing, dividends, rental income) but don’t want to pay estimated taxes, you can adjust your W-4 to have more withheld.

Step 3: Who Has to Fill Out a W-9 and When?

Unlike employees who fill out a W-4, independent contractors, freelancers, and self-employed individuals must complete Form W-9, Request for Taxpayer Identification Number and Certification. Here’s why and when you need a W-9:

• Who Needs to Fill Out a W-9?
  • Independent contractors and freelancers
  • Self-employed individuals providing services to a company
  • Vendors receiving payments from a business
  • Anyone receiving non-employee compensation exceeding $600 in a tax year
• When Do You Fill Out a W-9?
  • A business will request a W-9 before paying you for services.
  • You provide your Social Security Number (SSN) or Employer Identification Number (EIN) so the business can report payments to the IRS using Form 1099-NEC or 1099-MISC.
  • Unlike a W-4, a W-9 does not determine tax withholding—contractors are responsible for paying their own taxes, usually through quarterly estimated tax payments (Form 1040-ES).

Step 4: Review and Adjust Annually

Life changes quickly, and so can your tax situation. Review your W-4 at least once a year or when you:

• Marry or divorce
• Have a baby
• Buy a home
• Start a new job or change income levels
• Owe a significant tax bill or receive a large refund

Final Thoughts

Many people still think they need to decide on the number of allowances for their W-4, but that system went away in 2020. Now, getting your W-4 right means more financial control—whether that means taking home a bigger paycheck or avoiding an unexpected tax bill. If you’re unsure, using the IRS calculator and reviewing your situation annually is the best way to keep things on track.

For those who work as independent contractors or freelancers, remember that you need a W-9 instead, and you are responsible for making your own tax payments.

Still have questions? Let’s talk! I’m happy to help you navigate your tax strategy so you can make the best financial decisions for your future.