Historically, when an employee completed their W-4 form, they would need to also complete the associated Personal Allowances Worksheet. This would help them determine how many allowances to claim. Common choices were 1 or 0; these would dictate how much was withheld in taxes from the employee's paycheck. However, the W-4 form has changed, and there is no longer a Personal Allowances Worksheet. Instead, the amounts calculated on the W-4 are actual monetary figures that help to determine your tax withholding requirements.
Old W-4: Claim 0 or 1?
According to the IRS, the old W-4, which was revised in 2020, required employees to fill out the Personal Allowances Worksheet. This would first ask you to enter a 1 for yourself, then a 1 if you would file as married filing jointly or as head of household. Next, you would enter a 1 if any of the following applied: if you were single, or married filing separately, and had only one job; if you were married filing jointly, had only one job and your spouse did not work; or if the wages from your second job, your spouse's wages or the total of both was $1,500 or less.
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You then could add further allowances for the Child Tax Credit, with additional instructions being found in IRS Publication 972. Depending on your income level, you could enter anywhere from 0 to 4 additional allowances. You were also instructed to enter credit for other dependents, and then additional allowances for other credits.
There was also a Two-Earners/Multiple Jobs worksheet associated with the W-4. This would allow you to determine how many allowances to claim based both on your income and that of your spouse, if applicable, or your income if you have two jobs. This mattered because an individual earning $30,000 would be taxed in a certain bracket, but if their spouse was a high-earner or their second job paid them a large salary, they might find at tax time that they were under- or over-withheld.
New W-4 Structure
The new W-4, which took effect in December 2020, doesn't use the allowance system at all. Instead, it asks employees to state their filing status (single, married filing separately, married filing jointly, qualifying widower or head of household). Then, if you have multiple jobs or if your spouse works, you are instructed to use the IRS estimator, which can be found at www.irs.gov/W4app. You could also choose to use the new Multiple Jobs worksheet. It's very important to submit a W-4 for every job.
The third section relates to dependents. If your total income is under $200,000, or $400,000 if you are married filing jointly, you will need to enter $2,000 for each qualifying child under the age of 17. Then, enter $500 for any other dependent. Add these amounts.
You can then add in other income that you'd like to have taken into consideration when your tax responsibility is calculated. For instance, if you have a side job mowing lawns and you expect to earn $2,000 during the relevant calendar year, you might enter that $2,000 here since you know taxes won't be taken out and you need to account for it. Finally, you can enter any additional amounts that you would like withheld, for any reason.
Importance of Help From Professionals
The new W-4 was designed to be simpler and overall more straightforward than the old one. However, if you were well-versed in choosing whether to claim 0 or 1, or if you are struggling to understand the new W-4 form, you should get assistance from a professional.
Ask someone in your human resources department at work for help, or turn to a dedicated tax professional to guide you in selecting the best possible withholdings for your W-4. It's always better to pay the correct amounts throughout the tax year, rather than have a big bill at tax time. And while refunds may seem nice, they're just a sign that the IRS held on to too much of your money all year when you could have been investing it elsewhere.
Consider also: How to Fill Out a W-4 When Getting Divorced