Understanding Your Paycheck: W-4 Forms and Withholding

What the W-4 actually does

When you start a job, your employer hands you a Form W-4 , officially called the Employee's Withholding Certificate. It does not set your tax bill. It tells your employer's payroll system how much federal income tax to hold back from each paycheck and send to the IRS on your behalf, based on your expected income, filing status, and any other jobs or income you report.

At the end of the year, the total withheld gets compared to what you actually owe when you file a tax return. Withhold too little and you owe money at filing time, possibly with a penalty. Withhold too much and you get a refund, which is your own money coming back to you months later instead of sitting in your account.

Reading your pay stub

Your pay stub breaks your earnings into gross pay and net pay, with several deductions in between.

• Federal income tax withholding, set by your W-4.

• State income tax withholding, if your state charges one.

• Social Security tax, 6.2 percent of wages up to an annual cap.

• Medicare tax, 1.45 percent of wages with no cap.

Social Security and Medicare together make up FICA, and employers withhold this 7.65 percent combined rate from nearly every paycheck regardless of what you claim on your W-4.

Filling out the form as a student

The current W-4 skips withholding allowances and instead asks direct questions about your filing status, whether you hold more than one job, and whether you want extra tax withheld from each check. For most students working one part-time or seasonal job, filling in your filing status and leaving the optional sections blank produces a reasonable estimate.

If you work two jobs at once, or you and a spouse both work, fill out the multiple jobs worksheet on the form or use the IRS Tax Withholding Estimator . Skipping this step is the most common reason students end up owing money when they file, since each employer withholds as if that job were your only income.

Claiming exempt

You can write Exempt on the form only if you had no federal income tax liability last year and expect none this year.

This applies to some students with low part-time earnings, but it is not automatic just because you are a student, and it does not stop FICA withholding either way. Check your eligibility against the instructions on the official W-4 form before claiming it, and submit a new W-4 each year if you continue to qualify.

When to update your W-4

• You start a second job or add a summer job on top of a school-year job.

• Your hours or pay change significantly mid-year.

• You got a large refund or owed a large amount the previous year.

• Your dependency or filing status changes.

You can submit a new W-4 to your employer at any point in the year. Changes apply to future paychecks only, not ones already paid.