Most employers dedicate a day of orientation to their employees on their first day on the job. This day is normally filled with policies, procedures and a visit to Human Resources to complete a package of employment that includes tax forms, or the employee's withholding allowance certificates.

How to

The W-4 is the Employee's Withholding Allowance Certificate, which is a required form to be completed at the beginning of employment or after every event change in life, such as getting married, having a child, etc. The W-4 can be completed either online or on paper.

How Do I Fill Out the 2019 W-4 & Calculate Withholding Allowances? | Gusto

The W-4 begins the process for withholding tax; think of it as the instruction for your employer on what to do throughout the year. An employer uses the information on the W-4 to determine the amount of tax to withhold each pay period from your paycheck.

You need to calculate how many allowances you are claiming in calculating your tax withheld. The more allowances on W-4, the fewer taxes withheld from your paycheck (more take home net income). The fewer allowances on W-4, the more taxes withheld from your paycheck (less take home net income). It is to your advantage to claim the correct number of allowances on your W-4. This will help your employer withhold the correct liability for your tax bill by the end of the calendar year.

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It is a common mistake on W-4 to claim fewer allowances than they are entitled to in order to allow the employer to withhold more tax throughout the year. They hope to receive a big tax refund by the end of the tax year using the Treasury Department as a saving account forfeiting any interest on such saving. However, this financial decision is NOT beneficial to you because you are allowing the IRS to keep your money that you could be using to balance your budget, pay down your debt, invest, and achieve your financial goals. The best practice is to use the provided worksheet on the IRS website to correctly calculate your withholding allowances for completing your W-4.

The W-2 is the final statement that you get as the summation of all your withholding for a particular tax year. The W-2 is the form you will primarily use to file your taxes.

Practice

Now that you know the 2 most important forms for your tax cycle, think of paying it forward and discuss the process with a friend or a family member.

Congratulations! You can move on to Chapter 4. Detailed review of Form 1040

To review the full module on Federal Tax for the US individuals, click here.