The Form W-4 is also referred to as the Employee Withholding Allowance Certificate. It provides the employer the number of allowances for an employee’s federal income taxes to be deducted every payroll. The W-4 should be updated annually or when an employee experiences a change in their financial or life situation. Employees who experience a marriage, divorce, birth of a child, or dependent death should immediately update their W-4 allowances to ensure that they are not over or underpaying on their federal income taxes. An individual who overpays on their taxes, will most likely experience a refund the following year when filing their income tax returns. An individual who underestimates and subsequently underpays on their taxes, will likely need to pay the government for federal income taxes owed the following year.

Most employees must pay income taxes from their pay, however there are some individuals who may qualify for an exemption. Exemptions include people who have no tax liability or expect not to have a tax liability in the next year.

The number of allowances an individual may claim on their taxes is correlated to their personal circumstances such as their marital status, number of exemptions, number of dependents, and other financial factors. When an employee increases their number of allowances, the employee pays less towards their taxes. Should an employee decrease their allowances, the employee will pay more towards their taxes in their payroll. Federal Income tax withheld from an employee’s paycheck is collected by the employer and sent to the IRS after they run payroll.

Dependents are usually an employee’s children, adult relatives, or elderly parents living with the taxpayer. The IRS permits one allowance for an individual claiming Head of Household. For those individuals with childcare expenses in excess of $2000, the IRS also permits for them to claim an additional allowance in the form of a tax credit.