Welcome to Two Minute Money, Yahoo Finance’s new personal finance series offering quick explanations for some of the most important questions involving your money.
You got a new job—Congratulations! Now you’ve got to fill out the lots paperwork, and who doesn’t love filling out tax forms?
One of the most important forms is the W-4. The W-4 is the form that tells your company how much federal income tax to withhold from your paycheck to send to the federal government.
To start, you have to figure out how many allowances you can claim. An allowance is a number that helps your employer know how much to withhold. It’s determined based on your marital status, number of dependents and how many jobs you have.
If you claim zero allowances, the maximum amount of taxes will be withheld, and you are more likely to get a tax refund. This scenario is ideal for a college student who will be claimed on someone else’s tax return. If you are a single person working one job, claiming one allowance is usually the best bet.
Remember, you’re not a head of household if you’re single and live alone, so you should skip that allowance.
More allowances means less money withheld in taxes, but paying too little could leave you owing taxes in April instead of expecting a refund. To be sure, go through the worksheet on the W-4 to determine the perfect number of allowances for your situation.
Even if you’ve worked the same job for 10 years, there are a number of significant life events that are also tax events requiring you to update your W-4. Perhaps you got married. Married people who file jointly get to enjoy a lower tax rate than single people.
Or, maybe you got a second job — that’s the most common reason people change their W-4s. If your second job doesn’t have a W-4, you can still still change your W-4 at your main job to make up for the difference.
Then you’ll come to box seven. This asks if you’re exempt from paying federal taxes. It sounds confusing —who is exempt from paying taxes?— but it isn’t. If you know you won’t owe federal taxes this year and you were refunded everything you paid in federal taxes last year, you are exempt and should write it in the box. Otherwise, leave that box blank and move on.
You might like getting a big tax refund every year; it can feel like a bonus, but it’s not. A big tax refund probably means you’ve overpaid in taxes throughout the year and basically given the government an interest-free loan.
Pay enough to cover what you owe, but don’t overpay in the hopes of a big return. That’s money you could put to work now.
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