Salaries & Wages

Income tax is withheld from the pay of most employees. Your pay includes bonuses, commissions, and vacation allowances, in addition to your regular pay. It also includes reimbursements and other expense allowances paid under a nonaccountable plan. See Supplemental Wages, later.

Military retirees. Military retirement pay is treated in the same manner as regular pay for income tax withholding purposes, even though it is treated as a pension or annuity for other tax purposes.

Household workers. If you are a household worker, you can ask your employer to withhold income tax from your pay. Tax is withheld only if you want it withheld and your employer agrees to withhold it. If you do not have enough income tax withheld, you may have to make estimated tax payments, as discussed in chapter 2.

Farmworkers. Income tax is generally withheld from your cash wages for work on a farm unless your employer both:

1. Pays you cash wages of less than $150 during the year, and
2. Has expenditures for agricultural labor totaling less than $2,500 during the year.

If you receive either noncash wages or cash wages not subject to withholding, you can ask your employer to withhold income tax. If your employer does not agree to withhold tax, or if not enough is withheld, you may have to make estimated tax payments, as discussed in chapter 2.

Determining Amount of Tax Withheld

The amount of income tax your employer withholds from your regular pay depends on two things.

1. The amount you earn.
2. The information you give your employer on Form W-4.

Form W-4 includes three types of information that your employer will use to figure your withholding.

1. Whether to withhold at the single rate or at the lower married rate.
2. How many withholding allowances you claim (each allowance reduces the amount withheld).
3. Whether you want an additional amount withheld.

If your income is low enough that you will not have to pay income tax for the year, you may be exempt from withholding. See Exemption From Withholding, later.

Note. You must specify a filing status and a number of withholding allowances on Form W-4. You cannot specify only a dollar amount of withholding.

New job. When you start a new job, you must fill out a Form W-4 and give it to your employer. Your employer should have copies of the form. If you later need to change the information you gave, you must fill out a new form.

If you work only part of the year (for example, you start working after the beginning of the year), too much tax may be withheld. You may be able to avoid overwithholding if your employer agrees to use the part-year method, explained later.

Changing your withholding. Events during the year may change your marital status or the exemptions, adjustments, deductions, or credits you expect to claim on your return. When this happens, you may need to give your employer a new Form W-4 to change your withholding status or number of allowances.

You must give your employer a new Form W-4 within 10 days after either of the following.

1. Your divorce, if you have been claiming married status.
2. Any event that decreases the number of withholding allowances you can claim.

Events that decrease the number of withholding allowances you can claim include the following.

1. You have been claiming an allowance for your spouse, but you get divorced or your spouse begins claiming his or her own allowance on a separate Form W-4.
2. You have been claiming an allowance for a dependent, but you no longer expect to provide more than half the dependent's support for the year.
3. You have been claiming an allowance for your child, but you now find that he or she will earn more than $2,900 during the year. In addition, he or she will be:
   1. 24 or older by the end of the year, or
   2. 19 or older by the end of the year and will not qualify as a student.

4. You have been claiming allowances for your expected deductions, but you now find that they will be less than you expected.

Generally, you can submit a new Form W-4 at any time you wish to change the number of your withholding allowances for any other reason.

If you change the number of your withholding allowances, you can request that your employer withhold using the cumulative wage method, explained later.

Changing your withholding for 2002. If events in 2001 will decrease the number of your withholding allowances for 2002, you must give your employer a new Form W-4 by December 1, 2001. If an event occurs in December 2001, submit a new Form W-4 within 10 days. Events that decrease the number of your allowances for 2002 include the following.

• You claimed allowances for 2001 based on child care expenses, moving expenses, or large medical expenses, but you will not have these expenses in 2002.
• You have been claiming an allowance for your spouse, but he or she died in 2001. Because you can still file a joint return for 2001, this will not affect the number of your withholding allowances until 2002. You will also have to change from married to single status for 2002, unless you can file as a qualifying widow or widower because you have a dependent child, or you remarry. You must file a new Form W-4 showing single status by December 1 of the last year you are eligible to file as qualifying widow or widower.

Part-year method. If you work only part of the year and your employer agrees to use the part-year withholding method, less tax will be withheld from each wage payment than would be withheld if you worked all year. To be eligible for the part-year method, you must meet both the following requirements.

1. You must use the calendar year (the 12 months from January 1 through December 31) as your tax year. You cannot use a fiscal year.
2. You must not expect to be employed for more than 245 days during the year. To figure this limit, count all calendar days that you are employed, including weekends, vacations, and sick days, beginning the first day you are on the job for pay and ending your last day of work. If you are temporarily laid off for 30 days or less, count those days too. If you are laid off for more than 30 days, do not count those days. You will not meet this requirement if you begin working before May 1 and expect to work for the rest of the year.

How to apply for the part-year method. You must ask in writing that your employer use this method. The request must state all three of the following.

1. The date of your last day of work for any prior employer during the current calendar year.
2. That you do not expect to be employed more than 245 days during the current calendar year.
3. That you use the calendar year as your tax year.

Cumulative wage method. If you change the number of your withholding allowances during the year, too much or too little tax may have been withheld for the period before you made the change. You may be able to compensate for this if your employer agrees to use the cumulative wage withholding method for the rest of the year. You must ask in writing that your employer use this method.

To be eligible, you must have been paid for the same kind of payroll period (weekly, biweekly, etc.) since the beginning of the year.

Checking your withholding. After you have given your employer a Form W-4, you can check to see whether the amount of tax withheld from your pay is too little or too much. See Getting the Right Amount of Tax Withheld, later. If too much or too little tax is being withheld, you should give your employer a new Form W-4 to change your withholding.

Note. You cannot give your employer a payment to cover withholding for past pay periods. Nor can you give your employer a payment for estimated tax.

Completing Form W-4 and Worksheets

The discussion that follows explains in detail how to fill out Form W-4. It has more detailed information about some topics than the Form W-4 instructions.

In reading this discussion, you may find it helpful to refer to the filled-in Form W-4 in Example 1.3, later in this chapter.

Marital Status (Line 3 of Form W-4)

There is a lower withholding rate for people who can use the tax rates for joint returns. Everyone else must have tax withheld at the higher single rate. (Also, see Getting the Right Amount of Tax Withheld, later.)

You must claim single status if either of the following applies.

1. You are single. If you are divorced, or separated from your spouse under a court decree of separate maintenance, you are considered single.
2. You are married, but either you or your spouse is neither a citizen nor a resident of the United States. However, if one of you is a citizen or a resident, you can choose to have the other treated as a resident. You can then file a joint return and claim married status on your Form W-4. See Nonresident Spouse Treated as a Resident in chapter 1 of Publication 519, U.S. Tax Guide for Aliens, for more information.

You can claim married status if either of the following applies.

1. You are married and neither you nor your spouse is a nonresident alien. You are considered married for the whole year even if your spouse died during the year.
2. You expect to be able to file your return as a qualifying widow or widower. You usually can use this filing status if your spouse died within the previous 2 years and you provide a home for your dependent child. However, you must file a new Form W-4 showing your filing status as single by December 1 of the last year you are eligible to file as a qualifying widow or widower. For more information, see Qualifying Widow(er) With Dependent Child under Filing Status in Publication 501, Exemptions, Standard Deduction, and Filing Information.

Some married people find that they do not have enough tax withheld at the married rate. This can happen, for example, when both spouses work. To avoid this, you can choose to have tax withheld at the higher single rate (even if you qualify for the married rate). Also, you can fill out the Two-Earner/Two-Job Worksheet, explained later.

Withholding Allowances (Line 5 of Form W-4)

The more allowances you claim on Form W-4, the less income tax your employer will withhold. You will have the most tax withheld if you claim "0" allowances. The number of allowances you can claim depends on the following factors.

• How many exemptions you can take on your tax return.
• Whether you have income from more than one job.
• What deductions, adjustments to income, and credits you expect to have for the year.
• Whether you will file as head of household.

If you are married, it also depends on whether your spouse also works and claims any allowances on his or her own Form W-4. If you both work, you should figure your combined allowances on one Form W-4 worksheet. You then should divide the allowances among the Forms W-4 you each file with every employer. See Two jobs, later.

Form W-4 worksheets. Form W-4 has worksheets to help you figure how many withholding allowances you can claim. The worksheets are for your own records. Do not give them to your employer.

Complete only one set of Form W-4 worksheets, no matter how many jobs you have. If you are married and will file a joint return, complete only one set of worksheets for you and your spouse, even if you both earn wages and must each give a Form W-4 to your employers. Complete separate sets of worksheets only if you and your spouse will file separate returns.

If you are not exempt from withholding (see Exemption From Withholding, later), complete the Personal Allowances Worksheet on page 1 of the form. You should also use the worksheets on page 2 of the form to adjust the number of your withholding allowances for itemized deductions and adjustments to income, and for two-earner or two-job situations. If you want to adjust the number of your withholding allowances for certain tax credits, use the Deductions and Adjustments Worksheet on page 2 of Form W-4, even if you do not have any deductions or adjustments.

Complete all worksheets that apply to your situation. The worksheets will help you figure the maximum number of withholding allowances you are entitled to claim so that the amount of income tax withheld from your wages will match, as closely as possible, the amount of income tax you will owe at the end of the year.

Alternative method of figuring withholding allowances. You can take into account most items of income, adjustments to income, deductions, and tax credits in figuring the number of your withholding allowances. Because the Form W-4 worksheets use a simplified method to take these items into account, they do not always result in withholding that is exactly equal to the tax you will owe. You do not have to use the worksheets if you use a more accurate method of figuring the number of withholding allowances.

The method you use must be based on withholding schedules, the tax rate schedules, and the worksheet for Form 1040-ES, Estimated Tax for Individuals. (See How To Figure Estimated Tax in chapter 2.) It must take into account only the items of income, adjustments to income, deductions, and tax credits that are taken into account on Form W-4.

You can use the number of withholding allowances determined under this alternative method rather than the number determined using the Form W-4 worksheets. You must still give your employer a Form W-4 claiming your withholding allowances.

Two jobs. If you have income from two jobs at the same time, complete only one set of Form W-4 worksheets. Then split your allowances between the Forms W-4 for each job. You cannot claim the same allowances with more than one employer at the same time. You can claim all your allowances with one employer and none with the other, or divide them any other way.

Married individuals. If both you and your spouse are employed and expect to file a joint return, figure your withholding allowances using your combined income, adjustments, deductions, exemptions, and credits. Use only one set of worksheets. You can divide your total allowances any way, but you cannot claim an allowance that your spouse also claims.

If you and your spouse expect to file separate returns, figure your allowances separately based on your own individual income, adjustments, deductions, exemptions, and credits.

Employees who are not citizens or residents. If you are neither a citizen nor a resident of the United States, you usually can claim only one withholding allowance. This rule does not apply if you are a resident of Canada or Mexico, or if you are a U.S. national. It also does not apply if your spouse is a U.S. citizen or resident and you have chosen to be treated as a resident of the United States. Special rules apply to residents of Korea, Japan, and India. For more information, see Withholding From Compensation in chapter 8 of Publication 519.

Personal Allowances Worksheet

Use the Personal Allowances Worksheet on page 1 of Form W-4 to figure your withholding allowances for all of the following that apply.

• Exemptions.
• Only one job.
• Head of household status.
• Child and dependent care credit.
• Child tax credit.

Exemptions (worksheet lines A, C, and D). You can claim one withholding allowance for each exemption you expect to claim on your tax return.

Self. You can claim an allowance for your exemption on line A unless you can be claimed as a dependent on another person's tax return. If another person is entitled to claim you as a dependent, you cannot claim an allowance for your exemption even if the other person will not claim your exemption or the exemption will be reduced or eliminated under the phaseout rule.

Spouse. You can claim an allowance for your spouse's exemption on line C unless your spouse can be claimed as a dependent on another person's tax return. But do not claim this allowance if you and your spouse expect to file separate returns.

Dependents. You can claim one allowance on line D for each exemption you will claim for a dependent on your tax return.

Phaseout. For 2001, your deduction for personal exemptions is phased out if your adjusted gross income (AGI) falls within the following brackets.

If you expect your AGI to be more than the highest amount in the above bracket for your filing status, enter "0" on lines A, C, and D. If your AGI will fall within the bracket, use the following worksheet to figure the total allowances for those lines.

Only one job (worksheet line B). You can claim an additional withholding allowance if any of the following apply.

• You are single, and you have only one job at a time.
• You are married, you have only one job at a time, and your spouse does not work.
• Your wages from a second job or your spouse's wages (or the total of both) are $1,000 or less.

If you qualify for this allowance, enter "1" on line B of the worksheet.

Head of household (worksheet line E). You can file as head of household on your tax return if you are unmarried and pay more than half the cost of keeping up a home for yourself and your dependent or other qualifying individual. For more information, see Head of Household under Filing Status in Publication 501.

If you expect to file as head of household on your 2001 tax return, enter "1" on line E of the worksheet.

Child and dependent care credit (worksheet line F). Enter "1" on line F if you expect to have at least $1,500 of qualifying child or dependent care expenses that you plan to claim a credit for on your 2001 return. Generally, qualifying expenses are those you pay for the care of your dependent who is under age 13 or for your spouse or dependent who is not able to care for himself or herself so that you can work or look for work. For more information, get Publication 503, Child and Dependent Care Expenses.

Instead of using line F, you can choose to take the credit into account on line 5 of the Deductions and Adjustments Worksheet, as explained later under Tax credits.

Child tax credit (worksheet line G). If your total income will be between $18,000 and $50,000 ($23,000 and $63,000 if married), enter "1" on line G for each eligible child. If your total income will be between $50,000 and $80,000 ($63,000 and $115,000 if married), enter "1" on line G if you have two eligible children, enter "2" if you have three or four eligible children, or enter "3" if you have five or more eligible children.

Instead of using line G, you can choose to take the credit into account on line 5 of the Deductions and Adjustments Worksheet, as explained later under Tax credits.

Total personal allowances (worksheet line H). Add lines A through G and enter the total on line H. If you do not use either of the worksheets on the back of Form W-4, enter the number from line H on line 5 of Form W-4.

Deductions and Adjustments Worksheet

Fill out this worksheet to adjust the number of your withholding allowances for deductions, adjustments to income, and tax credits. Use the amount of each item you can reasonably expect to show on your return. However, do not use more than:

1. The amount shown for that item on your 2000 return (or your 1999 return if you have not yet filed your 2000 return), plus
2. Any additional amount related to a transaction or occurrence (such as the signing of an agreement or the sale of property) that you can prove has happened or will happen during 2000 or 2001.

Do not include any amount shown on your last tax return if that amount has been disallowed by the IRS.

Example 1.1. On June 30, 2000, you bought your first home. On your 2000 tax return you claimed itemized deductions of $6,600, the total mortgage interest and real estate tax you paid during the 6 months you owned your home. Based on your mortgage payment schedule and your real estate tax assessment, you can reasonably expect to claim deductions of $13,200 for those items on your 2001 return. You can use $13,200 to figure the number of your withholding allowances for itemized deductions.

Not itemizing deductions. If you expect to claim the standard deduction on your tax return, skip lines 1 and 2, and enter "0" on line 3 of the worksheet.

Itemized deductions (worksheet line 1). You can take the following deductions into account when figuring additional withholding allowances for 2001. You normally claim these deductions on Schedule A of Form 1040.

1. Medical and dental expenses that are more than 7.5% of your 2001 adjusted gross income (defined later).
2. State and local income taxes and property taxes.
3. Deductible home mortgage interest.
4. Investment interest up to net investment income.
5. Charitable contributions.
6. Casualty and theft losses that are more than 10% of your adjusted gross income.
7. Fully deductible miscellaneous itemized deductions, including:
   1. Impairment-related work expenses of persons with disabilities,
   2. Federal estate tax on income in respect of a decedent,
   3. Repayment of more than $3,000 of income held under a claim of right (that you included in income in an earlier year because at the time you thought you had an unrestricted right to it),
   4. Unrecovered investments in an annuity contract under which payments have ceased because of the annuitant's death,
   5. Gambling losses (up to the amount of gambling winnings reported on your return), and
   6. Casualty and theft losses from income-producing property.

8. Other miscellaneous itemized deductions that are more than 2% of your adjusted gross income, including:
   1. Unreimbursed employee business expenses, such as educational expenses, work clothes and uniforms, union dues and fees, and the cost of work-related small tools and supplies,
   2. Safe deposit box rental,
   3. Tax counsel and assistance, and
   4. Fees paid to an IRA custodian.

Adjusted gross income for purposes of the worksheet is your estimated total income for 2001 minus any estimated adjustments to income (discussed later) that you include on line 4 of the worksheet.

Enter your estimated total itemized deductions on line 1 of the worksheet.

Reduction of itemized deductions. For 2001, your total itemized deductions may be reduced if your adjusted gross income (AGI) is more than $132,950 ($66,475 if married filing separately). If you expect your AGI to be more than that amount, use the following worksheet to figure the amount to enter on line 1 of the Deductions and Adjustments Worksheet.

Standard deduction (worksheet line 2). Enter on line 2 the standard deduction shown for your filing status. Subtract line 2 from line 1 and enter the result on line 3.

If line 2 is more than line 1, enter "0" on line 3.

Adjustments to income (worksheet line 4). You can take the following adjustments to income into account when figuring additional withholding allowances for 2001. These adjustments appear on page 1 of your Form 1040 or 1040A.

• Contributions to a traditional IRA.
• Contributions to a retirement plan for self-employed individuals (Keogh plan or self-employed SEP or SIMPLE plan).
• Contributions to a medical savings account.
• Student loan interest deduction.
• Deduction for one-half of self-employment tax.
• Deduction for 60% of self-employed health insurance.
• Penalty on early withdrawal of savings.
• Alimony payments.
• Certain moving expenses.
• Net losses from Schedules C, D, E, and F of Form 1040 and from Part II of Form 4797, line 18b(2).
• Net operating loss carryovers.

Enter your estimated total adjustments to income on line 4 of the worksheet. Add lines 3 and 4 and enter the result on line 5.

Tax credits. Although you can take most tax credits into account when figuring withholding allowances, the Form W-4 worksheets use only the child and dependent care credit (line F of the Personal Allowances Worksheet) and the child tax credit (line G). But you can take these credits and others into account by adding an extra amount on line 5 of the Deductions and Adjustments Worksheet.

If you take the child and dependent care credit into account on line 5, do not use line F of the Personal Allowances Worksheet. If you take the child tax credit into account on line 5, do not use line G.

In addition to the child and dependent care credit and child tax credit, you can take into account the following credits.

• Credit for the elderly or the disabled. See Publication 524, Credit for the Elderly or the Disabled.
• Mortgage interest credit. See Mortgage Interest Credit in Publication 530, Tax Information for First-Time Homeowners.
• Foreign tax credit, except any credit that applies to wages not subject to U.S. income tax withholding because they are subject to income tax withholding by a foreign country. See Publication 514, Foreign Tax Credit for Individuals.
• Qualified electric vehicle credit. See Form 8834 instructions.
• Credit for prior year minimum tax if you paid alternative minimum tax in an earlier year. See Form 8801 instructions.
• Earned income credit, unless you requested advance payment of the credit. See Publication 596, Earned Income Credit.
• Adoption credit. See Publication 968, Tax Benefits for Adoption.
• General business credit. See Form 3800, General Business Credit.
• Hope credit. See Publication 970, Tax Benefits for Higher Education.
• Lifetime learning credit. See Publication 970.

To figure the amount to add on line 5 for tax credits, multiply your estimated total credits by the appropriate number from the following tables.

Example 1.2. You are married and expect to file a joint return for 2001. Your combined estimated wages are $65,000. Your estimated tax credits include a child and dependent care credit of $960 and a mortgage interest credit of $1,700.

In Credit Table A, the number for your combined estimated wages ($62,001 to $126,000) is 3.6. Multiply your total estimated tax credits of $2,660 ($960 + $1,700) by 3.6. Add the result, $9,576 to the amount you would otherwise show on line 5 of the Deductions and Adjustments Worksheet and enter the total on line 5. Because you choose to account for your child and dependent care credit this way, you cannot use line F of the Personal Allowances Worksheet.

Nonwage income (worksheet line 6). Enter on line 6 your estimated total nonwage income (other than tax-exempt income). Nonwage income includes interest, dividends, net rental income, unemployment compensation, alimony received, gambling winnings, prizes and awards, hobby income, capital gains, royalties, and partnership income.

Net deductions and adjustments (worksheet line 7). Subtract line 6 from line 5 and enter the result (but not less than zero) on line 7. If line 6 is more than line 5, you may not have enough income tax withheld from your wages. See Getting the Right Amount of Tax Withheld, later.

If line 7 is less than $3,000, enter "0" on line 8. If line 7 is $3,000 or more, divide it by $3,000, drop any fraction, and enter the result on line 8.

On line 9, enter the number from line H of the Personal Allowances Worksheet.

Total withholding allowances (worksheet line 10). Add lines 8 and 9 and enter the result on line 10. If you do not need to adjust your withholding based on a two-earner or two-job situation, enter the number from line 10 of the worksheet on line 5 of Form W-4.

Two-Earner/Two-Job Worksheet

You should complete this worksheet if any of the following three situations apply.

1. You are single or married filing separately, you have more than one job, and your combined earnings from all jobs exceed $35,000.
2. You are married filing jointly, you have a working spouse or more than one job, and your combined earnings from all jobs exceed $60,000.
3. You expect to owe an amount other than income tax, such as self-employment tax.

If only (3) applies, skip lines 1 through 7 and see Other amounts owed, later.

If you use this worksheet and your earnings exceed $150,000 if you are single, or $200,000 if you are married, see Publication 919 to check that you are having enough tax withheld.

Reducing your allowances (worksheet lines 1 - 3). On line 1 of the worksheet, enter the number from line H of the Personal Allowances Worksheet (or line 10 of the Deductions and Adjustments Worksheet, if used). Using Table 1 on the Form W-4, find the number listed beside the amount of your estimated wages for the year from your lowest paying job (or if lower, your spouse's job). Enter that number on line 2.

Subtract line 2 from line 1 and enter the result (but not less than zero) on line 3 and on Form W-4, line 5. If line 1 is more than or equal to line 2, do not use the rest of the worksheet (or skip to line 8 if you expect to owe amounts other than income tax).

If line 1 is less than line 2, you should complete lines 4 through 9 of the worksheet to figure the additional withholding needed to avoid underwithholding.

Additional withholding (worksheet lines 4 - 9). If line 1 is less than line 2, enter the number from line 2 on line 4 and the number from line 1 on line 5. Subtract line 5 from line 4 and enter the result on line 6.

Annual amount. Using Table 2 on the Form W-4, find the number listed beside the amount of your estimated wages for the year from your highest paying job (or if higher, your spouse's job). Enter that number on line 7. Multiply line 7 by line 6 and enter the result on line 8. If you do not expect to owe amounts other than income tax, this is the additional withholding needed for the year.

Other amounts owed. If you expect to owe amounts other than income tax, such as self-employment tax, include them on line 8. The total is the additional withholding needed for the year.

Additional withholding each payday. Divide line 8 by the number of paydays remaining in 2001. (For example, if you are paid every other week and you have had 5 paydays this year, divide by 21.) Enter the result on line 9 of the worksheet and on Form W-4, line 6. This is the additional amount you want withheld each payday.

Example 1.3

Joyce Green works in a bookstore and expects to earn about $13,300. Her husband, John, works full time at the Acme Corporation, where his expected pay is $48,500. They file a joint income tax return and claim their two children as dependents. Because they file jointly, they use only one set of Form W-4 worksheets to figure the number of withholding allowances. The Greens' worksheets and John's W-4 are shown in this chapter.

Filled-in Form W-4, page 1

Filled-in Form W-4, page 2

Personal Allowances Worksheet. On this worksheet, John and Joyce claim allowances for themselves and their children by entering "1" on line A, "1" on line C, and "2" on line D. Because both John and Joyce will receive wages of more than $1,000, they are not entitled to the additional withholding allowance on line B. The Greens expect to have child and dependent care expenses of $2,400. They enter "1" on line F of the worksheet. Because they are married, their total income will be between $23,000 and $63,000, and they have two eligible children, they enter "2" on line G.

They enter their total personal allowances, 7, on line H.

Deductions and Adjustments Worksheet. Because they plan to itemize deductions and claim adjustments to income, the Greens use this worksheet to see whether they are entitled to additional allowances.

The Greens' estimated itemized deductions total $11,200, which they enter on line 1 of the worksheet. Because they will file a joint return, they enter $7,600 on line 2. They subtract $7,600 from $11,200 and enter the result, $3,600, on line 3.

The Greens expect to have an adjustment to income of $3,000 for their deductible IRA contributions. They do not expect to have any other adjustments to income. They enter $3,000 on line 4.

The Greens add line 3 and line 4 and enter the total, $6,600, on line 5.

Joyce and John expect to receive $600 in interest and dividend income during the year. They enter $600 on line 6 and subtract line 6 from line 5. They enter the result, $6,000, on line 7. They divide line 7 by $3,000, and drop the fraction to determine their additional allowances. They enter "2" on line 8.

The Greens enter "7" (the number from line H of the Personal Allowances Worksheet) on line 9 and add it to line 8. They enter "9" on line 10.

Two-Earner/Two-Job Worksheet. The Greens use this worksheet because they both work and together earn over $60,000. They enter "9" (the number from line 10 of the Deductions and Adjustments Worksheet) on line 1.

Next, they use Table 1 on the Form W-4 to find the number to enter on line 2 of the worksheet. Because they will file a joint return and their expected wages from their lowest paying job are $13,300, they enter "3" on line 2. They subtract line 2 from line 1 and enter "6" on line 3 of the worksheet and on Form W-4, line 5.

John and Joyce Green can take a total of six withholding allowances between them. They decide that John will take all six allowances on his Form W-4. Joyce, therefore, cannot claim any allowances on hers. She will enter "0" on line 5 of the Form W-4 she gives to her employer.

Getting the Right Amount of Tax Withheld

In most situations, the tax withheld from your pay will be close to the tax you figure on your return if you follow these two rules.

1. You accurately complete all the Form W-4 worksheets that apply to you.
2. You give your employer a new Form W-4 when changes occur.

But because the worksheets and withholding methods do not account for all possible situations, you may not be getting the right amount withheld. This is most likely to happen in the following situations.

• You are married and both you and your spouse work.
• You have more than one job at a time.
• You have nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income.
• You will owe additional amounts with your return, such as self-employment tax.
• Your withholding is based on obsolete Form W-4 information for a substantial part of the year.
• Your earnings are more than $150,000 if you are single or $200,000 if you are married.

To make sure you are getting the right amount of tax withheld, get Publication 919. It will help you compare the total tax to be withheld during the year with the tax you can expect to figure on your return. It also will help you determine how much, if any, additional withholding is needed each payday to avoid owing tax when you file your return. If you do not have enough tax withheld, you may have to make estimated tax payments. See chapter 2 for information about estimated tax.

Rules Your Employer Must Follow

It may be helpful for you to know some of the withholding rules your employer must follow. These rules can affect how to fill out your Form W-4 and how to handle problems that may arise.

New Form W-4. When you start a new job, your employer should give you a Form W-4 to fill out. Your employer will use the information you give on the form to figure your withholding beginning with your first payday.

If you later fill out a new Form W-4, your employer can put it into effect as soon as possible. The deadline for putting it into effect is the start of the first payroll period ending 30 or more days after you turn it in.

No Form W-4. If you do not give your employer a completed Form W-4, your employer must withhold at the highest rate -- as if you were single and claimed no allowances.

Repaying withheld tax. If you find you are having too much tax withheld because you did not claim all the withholding allowances you are entitled to, you should give your employer a new Form W-4. Your employer cannot repay any of the tax previously withheld.

However, if your employer has withheld more than the correct amount of tax for the Form W-4 you have in effect, you do not have to fill out a new Form W-4 to have your withholding lowered to the correct amount. Your employer can repay the amount that was incorrectly withheld. If you are not repaid, your Form W-2 will reflect the full amount actually withheld.

Sending your Form W-4 to the IRS. Your employer will usually keep your Form W-4 and use it to figure your withholding. Under normal circumstances, it will not be sent to the IRS. However, your employer must send a copy of your Form W-4 to the IRS for verification in both of the following situations.

1. You claim more than 10 withholding allowances.
2. You claim exemption from withholding and your wages are expected to usually be more than $200 a week. See Exemption From Withholding, later.

The IRS may ask you for information showing how you figured either the number of allowances you claimed or your eligibility for exemption from withholding. If you choose, you can give this information to your employer to send to the IRS along with your Form W-4.

If the IRS determines that you cannot take all the allowances claimed on your Form W-4, or that you are not exempt as claimed, it will inform both you and your employer and will specify the maximum number of allowances you can claim. The IRS also may ask you to fill out a new Form W-4. However, your employer cannot figure your withholding on the basis of more allowances than the maximum number determined by the IRS.

If you believe you are exempt or can claim more withholding allowances than determined by the IRS, you can complete a new Form W-4, stating on the form, or in a written statement, any circumstances that have changed or any other reasons for your claim. You can send it directly to the IRS or give it to your employer to send to the IRS. Your employer must continue to figure your withholding on the basis of the number of allowances previously determined by the IRS until the IRS advises your employer to withhold on the basis of the new Form W-4.

There is a penalty for supplying false information on Form W-4. See Penalties, later.

Social security (FICA) tax. Generally, each employer for whom you work during the tax year must withhold social security tax up to the annual limit.

Exemption From Withholding

If you claim exemption from withholding, your employer will not withhold federal income tax from your wages. The exemption applies only to income tax, not to social security or Medicare tax.

You can claim exemption from withholding for 2001 only if both the following situations apply.

1. For 2000 you had a right to a refund of all federal income tax withheld because you had no tax liability.
2. For 2001 you expect a refund of all federal income tax withheld because you expect to have no tax liability.

Use Figure A in this chapter to help you decide whether you can claim exemption. Do not use Figure A if you are 65 or older or blind or if you will itemize deductions or claim dependents or tax credits on your 2001 return. These situations are discussed later.

Student. If you are a student, you are not automatically exempt. See Publication 4, Student's Guide to Federal Income Tax, to see whether you must file a return. If you work only part time or during the summer, you may qualify for exemption from withholding.

Example 1.4. You are a high school student and expect to earn $2,500 from a summer job. You do not expect to have any other income during the year, and your parents will be able to claim you as a dependent on their tax return. You worked last summer and had $375 federal income tax withheld from your pay. The entire $375 was refunded when you filed your 2000 return. Using Figure A, you find that you can claim exemption from withholding.

Example 1.5. The facts are the same as in Example 1.4, except that you have a savings account and expect to have $320 interest income during the year. Using Figure A, you find that you cannot claim exemption from withholding because your unearned income will be more than $250 and your total income will be more than $750.

Age 65 or older or blind. If you are 65 or older or blind, use one of the following worksheets to help you decide whether you can claim exemption from withholding. Do not use either worksheet if you will itemize deductions or claim dependents or tax credits on your 2001 return -- instead, see the discussion that follows the worksheets.

Worksheet 1.3
Exemption From Withholding Worksheet
for 65 or Older or Blind

Use this worksheet only if, for 2000, you had a right to a refund of all federal income tax withheld because you had no tax liability.
Caution. This worksheet does not apply if you can be claimed as a dependent. See Worksheet 1.4 instead.
1. Check the boxes below that apply to you.
65 or older	Blind
2. Check the boxes below that apply to your spouse if you will claim your spouse's exemption on your 2001 return.
65 or older	Blind
3. Add the number of boxes you checked in 1 and 2 above. Enter the result
You can claim exemption from withholding if:
Your filing status is:	and the number on line 3 above is:	and your 2001 total income will be no more than:
Single	1	$ 8,550
	2	9,650
Head of	1	$10,650
household	2	11,750
Married filing	1	$ 7,600
separately for	2	8,500
both 2000	3	9,400
and 2001	4	10,300
Other married	1	$14,300*
status	2	15,200*
	3	16,100*
	4	17,000*
*Include both spouses' income whether you will file separately or jointly.
Qualifying	1	$11,400
widow(er)	2	12,300
You cannot claim exemption from withholding if your total income will be more than the amount shown for your filing status.

Figure A: Exemption From Withholding Algorithm

Itemizing deductions or claiming dependents or tax credits. If you had no tax liability for 2000, use the 2001 Estimated Tax Worksheet in Form 1040-ES (also see chapter 2), to figure your 2001 expected tax liability. You can claim exemption from withholding only if your total expected tax liability (line 13c of the worksheet) is zero.

Claiming exemption. To claim exemption, you must give your employer a Form W-4. Write "EXEMPT" on line 7.

Your employer must send the IRS a copy of your Form W-4 if you claim exemption from withholding and your pay is expected to usually be more than $200 a week. If it turns out that you do not qualify for exemption, the IRS will send both you and your employer a written notice.

If you claim exemption, but later your situation changes so that you will have to pay income tax after all, you must file a new Form W-4 within 10 days after the change. If you claim exemption in 2001, but you expect to owe income tax for 2002, you must file a new Form W-4 by December 1, 2001.

An exemption is good for only one year. You must give your employer a new Form W-4 by February 15 each year to continue your exemption.

Supplemental Wages

Supplemental wages include bonuses, commissions, overtime pay, and certain sick pay. The payer can also figure withholding using the same method used for your regular wages. If these payments are identified separately from regular wages, your employer or other payer of supplemental wages may withhold income tax from these wages at a flat rate of 28%.

Also see Sick Pay, later.

Expense allowances. Reimbursements or other expense allowances paid by your employer under a nonaccountable plan are treated as supplemental wages. A nonaccountable plan is a reimbursement arrangement that does not require you to account for, or prove, your business expenses to your employer or does not require you to return your employer's payments that are more than your proven expenses.

Reimbursements or other expense allowances paid under an accountable plan that are more than your proven expenses are treated as paid under a nonaccountable plan. However, this does not apply if you return the excess payments within a reasonable period of time.

For more information about accountable and nonaccountable plans, see chapter 6 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Penalties

You may have to pay a penalty of $500 if both of the following apply.

1. You make statements or claim withholding allowances on your Form W-4 that reduce the amount of tax withheld.
2. You have no reasonable basis for those statements or allowances at the time you prepare your Form W-4.

There is also a criminal penalty for willfully supplying false or fraudulent information on your Form W-4 or for willfully failing to supply information that would increase the amount withheld. The penalty upon conviction can be either a fine of up to $1,000 or imprisonment for up to one year, or both.

These penalties will apply if you deliberately and knowingly falsify your Form W-4 in an attempt to reduce or eliminate the proper withholding of taxes. A simple error -- an honest mistake -- will not result in one of these penalties. For example, a person who has tried to figure the number of withholding allowances correctly, but claims seven when the proper number is six, will not be charged a Form W-4 penalty. However, see chapter 4 for information on the underpayment penalty.

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