The purpose of Form W-4, Employee’s Withholding Allowance Certificate, that you give your employer is to have the right amount of federal income tax withheld from your pay. The amount withheld is based on the filing status you indicate, and the number of allowances you claim for yourself, your spouse, and your dependents, as applicable. Since the federal income tax is a pay-as-you-go tax, the idea is to have a sufficient amount of tax withheld from your pay during the year to cover your tax liability.
When you file your annual federal income tax return you report your actual filing status and personal and dependent exemptions according to the IRS rules for filing status and exemptions. These may or may not be the same as you claimed on your Form W-4. Also, if you claim yourself as an allowance on Form W-4, this would not necessarily prevent someone else, such as your parents, from claiming you as a dependent when they file their tax return.
There can be various reasons for differences between your Form W-4 and your annual tax return. You may have gotten married or divorced, you may have children or you may no longer qualify to claim dependents you took into consideration when you completed the W-4.
When you have these types of changes in your life, it may be a good time to review the W-4 form your employer has on file and make any necessary changes. There is a Personal Allowances Worksheet, Deductions and Adjustments Worksheet, and Two-Earners/Multiple Jobs Worksheet on Form W-4 that help you determine the number of allowances you should claim based on different types of circumstances that affect your personal tax situation. You could also use the IRS Withholding Calculator.
You can claim the filing status and the number of allowances you choose on Form W-4. You might want to have more than enough tax withheld from your pay and receive a refund when you file your tax return. Or you may want to have just enough tax withheld and receive a minimal refund or owe tax when you file your return. But you should be sure to have enough tax withheld to avoid an underpayment penalty.
Generally, you can avoid the underpayment penalty if you owe less than $1,000 in taxes when you file your return after subtracting your withholdings and credits, or you paid at least 90% of the tax for the current year, or 100% of the tax shown on your return for last year, whichever is less.
You may also have other income not subject to withholding, such as income from investments, rental income, or income from a business. In this case, you could make estimated payments, or if you also work for a salary or wages you could adjust your W-4 and claim fewer allowances or indicate an additional amount to be withheld from each paycheck to cover the estimated tax on your other income.
Estimated Taxes, IRS
Form W-4, Employee’s Withholding Allowance Certificate, IRS
IRS Withholding Calculator, IRS
Publication 505, Tax Withholding and Estimated Tax, IRS
Tax Withholding, IRS