Withholding - Filling Out Form W-4 2021
Purpose of Form W-4
Every new employee is required by law to fill out Form W-4 so the employer can withhold the proper amount of federal income tax from the employee’s pay.
Form W-4 is not filed with the IRS, but is kept by the employer. A new Form W-4 may be filed with the employer at any time during the year should the employee’s situation change. It is recommended that employees review their withholding once a year.
The employer may also use the information from IRS Form W-4 to determine how much to withhold for state income tax. Note that withholding for Social Security and Medicare tax (FICA) is a set percentage and is not affected by what you can enter on Form W-4.
How Withholding is Computed
When preparing payroll, the employer refers to an IRS chart that states an amount of tax to withhold based on whether the employee is single or married, how much the employee earned during the pay period, and other information submitted on Form W-4.
The amounts on the withholding chart are an attempt to withhold the proper amount so the employees will have paid their tax liability through withholding during the year.
If tax liability on the return is more than the amount withheld, there will be a balance due. If the underpayment is substantial, penalties may apply.
If tax liability on the return is less than the amount withheld, the difference is refunded to the taxpayer. There is no penalty for having too much tax withheld. Keep in mind that big refunds are generally viewed as a bad tax planning strategy, since you are giving an interest-free loan to the government and getting your own money back the following year.