The W-4 Form determines how much federal tax you will have withheld for your paycheck during each pay period throughout the calendar year. Thus, it is a crucial document for several reasons: 1) it will impact how much money you take home every week or two; 2) it will impact how much tax you will owe at year’s end to the Federal government; 3) it will impact the size of your refund when you file your tax forms with the Federal government.

Most people will say that, ideally, they are able to strike a balance between not too great of a percentage of their income going to Federal taxes each paycheck and not too little, so that they can receive at least a modest refund during the first few months of the next calendar year. A small refund can do wonders for your psyche in March or April or May, making you feel like you are receiving a thank-you gift from the government for all of the money that you contributed towards it during the previous year. It can also give your budget a little boost at a time when you might need it.

The information that you give on your W-4 Form will drive the calculation that will determine how much is deducted from your paycheck during each pay period. You might want to review this form each year to have more or less income tax withheld from your paycheck. For instance, if you owed money to the Federal government when you filled out your tax forms at the end of a given year, then you need to increase the amount withheld each pay period. However, if you struggled to meet your budget each month yet received a large refund that was immediately spent, then you might want to decrease the amount withheld each pay period.

Part of the calculation involves what is called a Withholding Allowance, which is the amount of your total tax deductions divided by the personal exemption rate that you choose. This allowance is related to the number of dependents that you claim on your tax return.

As you fill out the W-4 Form, which you can download from the IRS website, follow these basic steps:

1. Fill in your name, address and Social Security number.
2. Check the correct box for “married” or “single.”
3. Calculate your number of withholding allowances. For most taxpayers, this is equal to the number of personal exemptions that they claim on their tax return each year (line 6d on Form 1040A or 1040).
4. If you have more than one job or your spouse works, or it you itemize your deductions, use the worksheet on page 2 of the W-4 form to calculate the number of allowances that you want to claim instead of relying on the number you used for personal exemptions. You can also use the IRS Withholding Calculator to do this.
5. If, for instance, you have more than one job, be sure to claim zero allowances at your second job. Remember that claiming “exempt” is not the same as claiming zero. If you claim zero, the highest amount of tax will be withheld, which is what you want for your second job income.
6. If you claim more than nine allowances, your employer might be required to send your W-4 to the IRS for review. Don’t panic. People with multiple and complicated itemized deductions might need to claim nine or more allowances.
7. Even if you want to be “exempt”, you cannot claim this unless your income for the year will be less than $800. If that is the case, you can skip lines 5 and 6 and write “exempt” on line 7.
8. You need to print your name, sign your name and date the form.
9. You also need to give the W-4 Form to your employer. S/he will fill out lines 8, 9 and 10.

There, you’re all done. Pay close attention to step 3 and you will achieve the perfect balance between the amount of Federal income tax withheld each pay period and the size of the refund you desire early in the next calendar year. Don’t let confusing tax language discourage you. Make the money you work so hard for work for you in the best way possible.