An employee fills out Form W-4 so her employer can withhold the correct amount of taxes from the employee’s paychecks. The form is two pages long. Most people only fill out the first page. This is fine as long as the employee is single and only has one job during the year. That second page becomes important when the employee:
- is married and the spouse also works
- has more than one job during the year
Spouse Also Works
The general assumption of Form W-4 is that the employee is the only one in the marriage that is employed. Since tax rates increase as the couple’s income increases, when an employee who has a working spouse fills out a Form W-4, that employee will likely be under-withheld at the end of the year if the employee simply claims “Married-2” on her Form W-4. This is because the Form W-4 assumes that the other spouse does not work and the employee’s income is the only income in the household.
Example: Ethel started a new job where she earns $50,000 per year. Her husband, Fred, also earns $50,000 per year. If Fred and Ethel each claim “Married-2” on their Forms W-4, they will each have about $4,108 of federal withholding from their paychecks for a total of $8,216. Assuming they take the standard deduction, have no children, and have no tax credits, their tax liability is $11,437, meaning they owe $3,221 at the end of the year, plus penalty and interest.
The problem is that each Form W-4 assumes that the total income for the couple is $50,000. At this level of income, the couple reaches the 15% tax bracket. However, the couple’s actual income is $100,000 and they reach the 25% tax bracket. The increase in the tax rate caused the balance due in the above example.
Employee Has More than One Job
A similar problem occurs when an employee has more than one job. The Form W-4 assumes that the employee’s wages, paid by the employer who receives the form, are the employee’s only income.
Example: Lucy has two jobs. One job pays $15,000 and the other jobs pays $40,000. She claims “Single-1” on each Form W-4. She will have $858 federal tax withheld from her $15,000 wages and $4,550 withheld from her $40,000 wages. Her total withholding is therefore $5,408.
If she had only one job, claimed “Single-1” on the Form W-4, and earned $55,000, her federal tax withheld would be $7,800.
Her actual tax liability assuming she is single, has no children, and has no tax credits is $6,968. She will owe $1,560 if she has two jobs, and would receive a $832 refund if she had one job.
Again, this is caused by the Form W-4 assuming that the employee’s wages from the employer who receives the Form W-4 are the employee’s only income. In actuality, the employee has other income and is bumped into a higher tax bracket.
How to Solve the Problem
The second page of the Form W-4 has a worksheet for couples where both spouses work and for single people with more than one job. This worksheet reduces the number of allowances (and therefore increases the taxes withheld) based on each spouse’s income, or in the case of single people, based on the income from each job. The worksheet also determines an additional amount of withholding that should be withheld from each paycheck.
If the second page seems intimidating, another option is to have a tax professional run a tax projection to get a better idea of the couple’s total income, deductions, and credits. This will be more accurate than using the second page of the form. The optimal amount of withholding can then be determined.
If you have questions on how this relief applies to you, give us a call.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.