One of the biggest decisions to make after you get married is how the two of you will work together to manage your finances. For some couples, that means combining everything while other couples keep all their accounts and assets separate. But, when it comes to taxes, the IRS doesn’t care how you manage your money as long as your taxes are paid correctly. Sitting down with your spouse and taking the time to answer the question, “What should I claim on my W-4 when married?” will help you both budget for taxes and avoid interest and penalties.
Couples should generally use the Two-Earners/Multiple Jobs Worksheet to calculate how many personal allowances to claim on the highest paying job, and then claim zero allowances on all remaining jobs.
Purpose of the Form W-4
Your employer is required to withhold money from your paycheck for the income taxes you’ll owe when you file your tax return. The amount withheld is calculated based on your income, filing status and personal allowances claimed. Obviously, your employer knows your income. However, to find out your filing status and personal allowances, your employer needs you to submit a Form W-4 to supply that information. If you don’t complete a W-4 form, your employer will withhold taxes at the highest rate, which is as if you were single and you didn’t claim any personal allowances.
Filing Status Options
If you’re legally married, you have two options when it comes to the filing status you use on your Form W-4 when you file: married or married, but withhold at the higher single rate. The married option results in lower income tax withholding because the tax brackets for couples filing a joint return result in lower tax liability than the single tax brackets. If you plan to file a joint tax return, the married tax rate will usually be more accurate for reflecting your tax liability. But if you plan to file separately from your spouse, or if you simply prefer to receive a larger refund, you can opt for the married, but withhold at the higher single rate option.
Calculating Allowances to Claim
To calculate how many allowances you are entitled to claim, start by filling out the Personal Allowances Worksheet with your spouse. This worksheet tells you how many allowances you should generally claim on your Form W-4 for your job based on your personal situation, such as your filing status, whether anyone else can claim you as a dependent and tax credits for children and other dependents.
Some taxpayers can stop after filling out the Personal Allowances Worksheet to figure out how many personal allowances to claim. However, if both you and your spouse work, or if you work multiple jobs, you should work with your spouse to complete the Two-Earners/Multiple Jobs Worksheet that is included with Form W-4. Completing this worksheet will tell you the number of allowances you should claim on Form W-4 for the highest-paying job between the two of you. You should then claim zero allowances on the remaining jobs. For example, say your spouse has one job that pays $75,000 and you work two jobs that each pay $40,000. Your spouse should claim all the allowances that the Two-Earners/Multiple Jobs Worksheet says you, as a couple, are entitled to claim, and then you would claim zero allowances on each Form W-4 that you complete for your two jobs.
If you plan to claim substantial adjustments to your income or if you will itemize your deductions, you may be entitled to claim more allowances than indicated on the Two-Earners/Multiple Jobs Worksheet. If you want to minimize your withholding, also complete the Deductions, Adjustments, and Additional Income Worksheet to see if you are entitled to claim any additional allowances. You should also complete the Deductions, Adjustments, and Additional Income Worksheet if you have significant income that isn’t subject to tax withholding such as freelancing income or interest and investment income. To complete the Deductions, Adjustments, and Additional Income Worksheet, you need to estimate how much income you’ll earn during the year that isn’t subject to withholding as well as the sum of your adjustments to income and itemized deductions. If you get a higher number of allowances than you did when completing the Two-Earners/Multiple Jobs Worksheet, use that amount as the number of allowances you claim on your highest income job and zero allowances on the remaining jobs.
Requesting Additional Withholding
If you expect to have additional tax liabilities when you file your return from income other than your employee income, you can request that your employer withhold an additional specific amount from each paycheck so you won’t have to make any estimated tax payments. For example, say that you are expecting to owe $1,800 in taxes on your investment income during the year. If you’re paid monthly, you can complete a Form W-4 with your employer that requests an additional $150 be withheld for federal income taxes. That way, when you file your tax return at that end of the year, an additional $1,800 will have been withheld so that you won’t owe additional interest or penalties.
Minimum Withholding Required
You don’t receive any interest on the amounts withheld from your paycheck for the time the money sits with the federal government until you file your return, you may be thinking you should simply claim lots of allowances, set aside the money that would have been withheld in an interest-bearing account, and then pay it all when you file your taxes. Unfortunately, the federal tax code sets minimum amounts that you must pay in throughout the year to avoid interest and penalties when you file your tax return. But, the IRS doesn’t expect perfection: There are several safe harbors that allow you to avoid being penalized for underwithholding even if you still have to write a check when you file your tax return at the end of the year.
First, if you owe less than $1,000 in taxes, you won’t be penalized. Second, as long as your withholding totals at least 90 percent of your total tax liability for the current year, you won’t be penalized. For example, say your tax liability for the year is $8,000. As long as your withholding equals at least $7,200, you won’t owe a penalty.
The third safe harbor is based on your income and your tax liability for the prior year. If your adjusted gross income was $150,000 or less (or $75,000 or less if you’re married filing separately), your withholding must equal at least 100 percent of what you paid in taxes the prior year, regardless of what you owe this year. For example, if last year, your adjusted gross income was $120,000 and your tax liability was $10,000, as long as your withholding is at least $10,000 this year, you won’t be penalized, even if your withholding is $10,000 and your tax bill is $40,000.
If, however, your adjusted gross income for the prior year is more than $150,000 (or more than $75,000 if you’re married filing separately), the minimum withholding to meet this safe harbor bumps up to 110 percent of what you owed the prior year. For example, if your adjusted gross income was $180,000 and your tax liability was $20,000 last year, your withholding would need to be at least $22,000 to meet the requirements.
Penalties for Claiming Excess W-4 Allowances
If you claim too many Form W-4 allowances so you don’t have enough taxes withheld, you obviously have to pay the difference with your income tax return. In addition, the IRS charges interest and potential penalties for not paying what you owed throughout the year. If you do owe a penalty, you don’t have to calculate it by hand unless you are requesting a waiver of just part of the penalty, are using the annualized income installment method to calculate the penalty or are treating the income taxes withheld as if they were paid on the dates withheld rather than averaged over the course of the year. Instead, you can request that the IRS determine the penalty when you submit your tax return and the IRS will send you a bill.
In very limited circumstances, you can request that the IRS use its discretion to waive the penalty, but neither is particularly applicable to withholding based on your Form W-4. First, if you miss an estimated payment because of a natural disaster or other unusual circumstance, such as your home burning down, the IRS can waive the penalty if it would be unfair to impose it given the circumstances. Second, if you retire during the year or the prior year after turning at least 62 years old, and you don’t have enough tax withheld due to reasonable cause, the IRS can also be benevolent and waive the penalty.
In addition to the tax penalties, if the underwithholding is due to you willfully giving false information to calculate your withholding, you could face additional civil penalties. The maximum civil penalty is a $500 fine. For example, if you’re married without kids and aren’t itemizing or claiming substantial deductions or credits, but you claim 12 allowances on your Form W-4 to avoid having any income taxes withheld, you’ll probably face civil penalties.
Effects of Overpaying Taxes
If you claim fewer allowances on your W-4 form than you’re entitled to claim, you’ll usually end up having more money withheld from your paycheck than you need to cover the taxes that are due. While the IRS won’t penalize you for having too much withheld, it could be hurting your bottom line, especially if you owe money on high-interest debt.
When the excess money is withheld from your paycheck, you don’t get that money back until you file your tax return and receive your refund. The IRS won’t pay you interest for the time it holds the money prior to you getting your refund, but your creditors will continue to charge you interest until you pay off that debt. If you didn’t have that extra withheld, you could have used the excess to pay down the debt and save on interest. However, some people prefer to have extra withheld as a way to force them to save.
Updating Your Form W-4
If you realize that you aren’t having the right amount of allowances reported on your Form W-4, you don’t have to wait until the end of the year or a major event to change it. No matter what the reason, you can submit a new Form W-4 to your employer at any time. Once you submit it, your employer must start withholding at the new rate beginning no later than the first pay period that starts 30 days or more after you submit the form. Your employer might start implementing the new information faster than that but can’t do it any slower.
- The greater the number of allowance you claim, the smaller amount of taxes your employer will withhold. You'll want to be as accurate as possible. If your employer withholds too little, you might be stuck with a big tax bill when you file your returns. You might even get hit with an underpayment penalty. If your employer withholds too much, you'll get a tax refund. Even though a fat refund is nice, it actually represents an interest-free loan to the government. The best course for many married couples is to withhold just enough that you break even come tax time.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."