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Understanding Taxes and the Effects of a W-4

April 01, 2021
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If you don’t have a firm grasp on the different tax forms and what they mean, you’re not alone. For most, they only bump into this problem when starting a new job. Let’s talk taxes.

So, whether you are starting a new job, starting a side hustle, or plan on making changes for the upcoming year, it might be time to get a better understanding of how it all works.

In this post, we’ll take you through three different tax forms – W-4, W-2, and 1099-MISC. We’ll highlight their differences and then talk more in detail about Form W-4.

What is withholding allowance?

A withholding allowance is a form of tax exemption, and it can reduce the income tax deducted from an employee’s paycheck by the employer.

The calculation of claimed withholding allowances is done through the Internal Revenue Service (IRS) Form W-4, which we’ll discuss at length later in this post.

How much allowance is withheld depends on the filing status of a taxpayer – whether filing jointly with a partner or separately, or as the head of a household.

The number of claimed withholding allowances are also considered. More claimed tax allowances result in an employer withholding less income tax from an employee’s paycheck.

Every person who goes through significant financial changes needs to file a new Form W-4.

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Forms W-4, W-2, and 1099-MISC and their differences

Form W-4

Form W-4: An Employee’s Withholding Allowance Certificate, tax Form W-4, needs to be completed by employees. Through this form, the employer has access to the relevant information for knowing the amount of tax to be withheld annually.

Along with the form, employees were previously provided a personal allowances worksheet, which helped the employee to calculate the number of allowances that could be claimed on the W-4. However, the present-day Form W-4 has undergone several changes, which we’ll discuss later.

Form W-2

Form W-2: The Wage and Tax Statement, tax Form W-2, is important for businesses during the tax filing process. It displays the taxes and income that are withheld from the annual income of an employee.

According to the guidelines of the IRS, employers are required to provide their employees with copies of their W-2 by January 31 each year.

Employees who fail to receive their respective copies of Form W-2 within the stipulated period have to take certain steps to get them. Not getting them on time restricts employees from filing their income tax returns.

Form 1099-MISC

Form 1099-MISC: Summary of Payments, tax form 1099-MISC, is a form that employers are required to complete. Withholdings aren’t required to be mentioned in this form.

Copies of this form have to be provided to employees by January 31st each year.

The form reports the amount that the employers pay to their employees along with details such as name, address, TIN or SSN. However, the form’s payee is responsible for all tax payments.

How Form W-4 affects taxes

As we mentioned before, Form W-4 has undergone several significant changes. The most major change has been the removal of allowances. Before the changes were made, the tax to be withheld by the employer was calculated on the basis of allowances claimed by employees.

However, now, employees are only required to submit information including:

  • Income from other jobs
  • Expected filing status
  • Planned tax deduction claims
  • Number of dependents.

Following the submission of this form, it becomes the responsibility of the employer to figure out the tax to be withheld from an employee’s paycheck.

All in all, the new Form W-4 has made things simpler for employees working across most businesses. Ultimately, how complex your Form W-4 is to complete depends on what your tax situation is.

If you have one job and don’t have dependents, are not filing for joint returns, and don’t have any sources of non-employment income, your tax situation is more or less simple. If your tax situation is similar, you only have to provide details such as your name, filing status, and SSN.

However, if your tax situation is more complex, you’ll need to fill information such as the income sources of your spouse, details of dependents, along with the tax credits and deductions that you plan to claim.

Finding that information can be tricky, but it’s not as hard as it may seem. Most details can be found listed on your previous year’s tax return.

The new Form W-4 also allows employees to cover taxes of their side jobs, which has definitely been a plus for employees who also work as freelancers.

However, it’s purely the employee’s choice as to how to go about paying their taxes. Tax refunds can be increased as well by adding an additional amount (in dollars) on Line 4(c) of the form as “extra withholding”.

What happens if Form W-4 is not accurately filled out?

If the Form W-4 is not accurate, it may result in two potential outcomes:

  • Withholding too much has the potential to create a refund when employees submit their tax return filings.
  • Not paying sufficient federal income tax throughout the year may lead to a tax bill being slapped on you, with a penalty on top.

How to make changes to Form W-4 to change refund status

You can alter the information on your Form W-4 based on the kind of refunds you want. People who prefer big refunds annually tend to overpay taxes.

However, for many employees, a smaller refund works better, as it allows them to retain more money during the year, which can be helpful during emergencies.

To make changes to the refund statuses on your Form W-4, you can submit the new information to your employer in a new Form W-4.

If more personal allowances are added to the W-4 worksheet, you’ll have more money every month. However, if you tend to owe taxes every year, you should reduce the number of personal allowances on your Form W-4.

For the best outcome considering your financial situation, you should use the withholding calculator on the official IRS website.


The above information will hopefully help clarify this topic and allow you to make an informed decision when choosing what’s right for you. However, reach out to your Human Resources department or tax accountant if you have any questions as to how you should complete your tax forms.


This article is for general educational purposes only and is not written by a financial advisor.


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