Prior to 2020, you had the option of claiming zero allowances on your Form W-4 to increase the amount of taxes withheld from your paycheck. Why would you want to do that? For a number of reasons that would ensure you didn't underpay or overpay your taxes during the year.
With the release of the new W-4 in 2020, allowances disappeared, but you can still claim dependents. Reviewing the correct way to fill out your W-4 will help you make sure you pay the right amount of taxes each year via payroll deductions, or at least as close as you can come to getting the right amount deducted.
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What Is a W-4?
During your career, you might work as an employee, an independent contractor, a gig worker or freelancer, or own your own business. When you work as an employee, you must fill out a W-4 so your employer knows how much tax to deduct from your paycheck and send it to local or state governments and the federal government.
If you are self-employed, you fill out a Form W-9 (depending on your relationship with certain clients), which those businesses or individuals use to fill out and submit a 1099 to you and the government. Clients don't take taxes out of what they pay you, but they do report your earnings to the IRS.
Read More: Choosing Head of Household When Filing Your Taxes
What Were Allowances?
Until the new Form W-4 came out, you could claim allowances that helped reduce your taxes. For example, if you were single, you could claim zero or one (for yourself) allowance, depending on whether you wanted to have more or less tax withheld from your paychecks.
You would want more taxes withheld if you had other income coming in and wanted to make sure you paid your taxes on that income in a timely manner. If you waited until April 15 to disclose that income, you might have a penalty for late payment on that income. If you overpaid your taxes, you'd get a refund. You could also claim dependents as allowances, further reducing your tax withholding.
Read More: Form 1040: What You Need to Know
What’s New Since 2020?
One of the main changes to the new W-4 is that you no longer claim allowances. You can still claim dependents, however, explains TurboTax. These include family members for whom you pay more than 50 percent of their expenses.
Divorced parents, though, can't each claim the same children as dependents because only the parent who pays most of their expenses can claim them as dependents. You should visit the IRS website page that explains who qualifies, then claim your dependents in Step 3 of the W-4.
The W-4 has changed in other ways, too. For example, in Step 2 of the form, you declare income from a second job, or if you have a spouse with a job who is filing jointly with you. You can use the IRS Tax Withholding Estimator for help finding your withholding levels.
You don't need to fill out a new W-4 if your life situation hasn't changed your filing status and dependents (for example, you married or divorced, had children, took in a dependent parent or minor children aged out).