Offsetting the euphoria of landing a new job is the stack of paperwork awaiting the new hire. Insurance forms, identification confirmations, citizenship representations and enrollment documents for myriad benefits. Also among the pile of paper is the IRS W-4 form that helps the employer figure out how much of the paycheck is to be held back for the government.
In most cases, filling out this document is fairly simple. It gets a little more complex, however, when the new employee has another job or multiple sources of income. Unless the W-4 is accurate, the new company might withhold too little.
Anatomy of an IRS W-4
The W-4 as published by the Internal Revenue Service (IRS) is presented in five components. The first section consists of personal information, and the last is where the taxpayer executes the document. The three sections in between relate to the new employee's circumstances.
For example, is the person married and does the spouse work? Does the new hire have children or other financial dependents? Does the person receive regular income from other sources?
These middle steps help the human resources staff to customize the withholdings according to the new associate's tax status and revenue streams.
Included with every W-4 are instructions and a worksheet to account for multiple jobs.
Tax Withholding Estimator
The IRS provides a tax withholding estimator on its website. Using this online calculator allows a new hire to quickly ascertain the right rate at which money is to be deducted from the paycheck without having to take time on a worksheet. In addition, life changes like marriage, having a baby, moving aging parents in and similar events are going to affect tax status, causing withholdings to change accordingly.
Using the online estimator regularly, comparing its numbers to the withholding on the pay stub, keeps the taxpayer abreast of just how many dollars need to be held back by the employer.
Using the Worksheet
Included with every W-4 are instructions and a worksheet to account for multiple jobs. Also attached is a table reflecting deductions relative to salary/wage figures.
Locating the junction between the "higher-paying job" row and the "lower-paying job" column is to discover the annual withholding. This, in turn, is divided by the number of pay periods each year to yield the regular withholding for each pay period. In the case of three jobs, the employee adds the two higher-paying salaries together to locate the correct amount in the row. If necessary, you can enter an extra withholding amount on line 4c of your W-4.
Two Jobs with Similar Pay
Checking the box at step 2(c) of the W-4 for each job will allow the system to divide the standard deduction and tax brackets equally between the two jobs. The upside here is that no new W-4 is required when pay is increased. However, there is a chance that too much will be held back. Nevertheless, those who do not mind waiting for the refund should very well consider this avenue, if only for simplicity's sake.
What About Non-Work Income?
Step 4(a) allows the employee to inform the employer that other revenue streams are flowing into the household. This is, of course, entirely optional and dependent on whether the recipient wants to pay taxes on investment dividends, rental remittances and retirement income sooner rather than later.
It is worth noting that revealing more financial information on the W-4 benefits the company for whom you work and toil. Those who seek pay increases might have to do so on merit over need since the company is more familiar with how much money comes into the house.