What Does ‘Allowances’ On Form W-4 Mean?

The W-4 is a form provided by the Internal Revenue Service (IRS) and used by employers to determine how much tax should be withheld from their employees’ paychecks. Since the IRS allows numerous deductions, the amount withheld from each paycheck will vary from person to person. However, accurately calculating the allowance on Form W-4 will decrease the likelihood that you will be required to pay additional taxes when it comes time to file your tax return.

Each paycheck provided by an employer indicates that at least three amounts have been deducted from the employee’s gross pay: federal income tax withholdings, Medicare and Social Security. These values are based on the employee’s entire gross income unless an employer-filed W-4 alters them. The more allowances you claim, the more gross income you are entitled to keep from each paycheck. Likewise, the fewer allowances you claim, the more money will be withheld each paycheck. Ideally, the W-4 should allow the employer to withhold just enough tax so that the employee would neither need a refund at the time he or she files the tax return nor need to pay additional taxes due to under-withholding.

Exemptions on a W-4 decrease the amount of tax that an employee must pay by decreasing the amount of income that is taxed. You can claim yourself as one exemption and, typically, your spouse can be another exemption. There may also be exemptions for qualifying dependents as defined by IRS regulations. If you qualify, filing as Head of Household is not traditionally considered an exemption, but it can still lower your taxes.

Also included in the W-4 calculations are deductions. For instance, if there are two wage-earners in the family or if you have more than one job, you will need to complete the Two Earners/Multiple Jobs Worksheet. In addition, you may need to use the Deductions and Adjustments Worksheet should you want to itemize your deductions. Take care to thoroughly read all instructions to ensure that each allowance calculation is correct for your specific situation.

While deductions exemptions lower your tax by decreasing the amount of income on which you are required to pay taxes, credits also lower your tax by decreasing the amount of tax that needs to be paid. Lines G and F cover the Child Tax Credit and the Child Care Expenses Tax Credit, which are the two most commonly claimed credits on annual tax returns.