• Daniel Snitkovskiy

Death and Tax Forms: How to Fill Out the W-4 and W-9

U.S. taxes are complicated and require taxpayers to sift through a multitude of tax documents 😫. To break down the most common tax documents, we'll first start by breaking the process of taxation in the U.S. into 3 distinct parts:

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  • Intake: This is where you provide information to the entities you receive income from.

  • Reporting: This is where you receive information from the entities providing you income (informed by the intake forms).

  • Filing: This is where you file your tax returns (informed by reporting forms).

This edition is all about intake, and we'll be diving into the 2 most common intake forms: Form W-4 and Form W-9. This will go more into the weeds of these tax forms, so definitely check out our article on personal income taxes for a general introduction to taxes.


👤Intake Forms: Creating Your Tax Profile


Try to remember the last time you created a profile on a website; what kind of information did you have to give in order to sign-up? Let's use Twitter as an example:

Credit: Twitter

When signing up, you have to give your Name (which will be displayed on your bio/posts), your Phone/Email (for two-factor authentication), and your Date of Birth (used for age restrictions/targeted ads). All of this is what Twitter needs in order for you to be able to use it, and each piece of information is used for different purposes.


Intake Forms play a similar role in the U.S. tax system! It's where you provide the necessary information in order to operate in this system, allowing the necessary parties to adjust the experience based on your profile. Unlike Twitter, however, you aren't allowed to take a break ☹️.


Who do you send these forms to?

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These forms are for the entity that pays you money (i.e. your income source). This could be your full-time employer, or your client if you do freelance/contract work. This is because the information in the forms is what enables them to fulfill their reporting obligations (e.g. send you a W-2/1099, withhold taxes, etc.) Do not send these to the IRS.


When do you need to fill these out?

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There are 2 times when you'll fill out these forms:

  • Onboarding: the most common situation you'll be filling out these forms is when you start a new job! The company you work for or your client needs this information in order to legally employ you.

  • Updating: you can re-submit these forms at any point! You can do this if your information changes (e.g. you move), or you simply want to make adjustments (e.g. change your W-4 withholding).


What information is requested on these forms?

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Though the information that's requested is driven by the reporting form (i.e. W-2/1099) that'll eventually be sent to you by your income source, all of these intake forms ask for:

  • Address: Remember how we talked about tax jurisdictions in our last article? Since where you live informs which taxes apply to you, what your income source has to do might changed based on where you live.

  • Identity: This is a combination of your legal name and your tax identification number (TIN). The most common example of a TIN is a Social Security Number (SSN). Your TIN + legal name is used to keep track of you in various government databases (e.g. IRS, Social Security Administration, etc.).

  • Tax Status: Just like where you live determines which taxes apply to you, there are a set of categories that significantly change how you're treated tax-wise. These can include everything from whether or not you're married, to whether or not you own a business.


⏱W-4 Form: Defining Your Payment Plan to the IRS (Full-Time Employee)


Formally called the Employee's Withholding Certificate, the W-4 form's purpose is to give your employer enough information so that they can correctly determine your federal withholding. As a quick recap, withholding is the "pay-as-you-go" portion of the U.S. tax system, where you (or rather, your employer on your behalf), make payments toward your estimated tax bill. Why does properly calculating withholding matter?

  1. Take Control of When You Pay Your Taxes: If you don't put thought into your withholding calculation, you could end up with a tax situation that's not ideal for you. Want more take-home pay so you can invest it throughout the year? Strive to withhold the bare minimum. Want to hide as much money from yourself so you can't spend it or enjoy getting a large tax refund? Strive to withhold more.

  2. Avoid Underpayment Penalties: There are certain situations where underpayment (i.e. not withholding enough) can result in various penalties.

To help us go through this form, let's meet Alix! They are single (no dependents), and just started a new full-time job on January 1, 2020 making an annual salary of $75,000 (paid at the end of every month). How would they fill out their W-4 form? Here is a link to the W-4 form so you can follow along!*


* Note: You might be asked to fill out this information in some online portal (e.g. Workday, DocuSign, etc.), but this is asking for the same information as the raw IRS form, just with better UX.


Required Fields

The 2020 W-4 is a revamped version of a traditionally long and daunting tax form. Though there are optional sections that depend on your situation, there are only two sections that you're required to fill out!


Step 1: Personal Information

This is where we provide our Address, Identity, and Tax Status. The Tax Status in this case is called your filing status. Since Alix does not have any dependents (i.e. children/elderly family member), their filing status would be single. If they had dependents, it'd be Head of household. If they were married, they could choose to either file jointly (i.e. you and spouse file as one entity) or separately (i.e. you both file individual returns)*.


* Note: The best way to see which of joint/separate will result in the most tax benefits is to file both ways and compare! You could also just use the filing status from last year's return if your situation didn't change that much.


Step 5: Signature

Since the W-4 is you and your employer tag-teaming to make sure your taxes are properly withheld, this section is where you and your employer will sign on the dotted line to make sure you're both holding up your end of the bargain*.


* Note: The Employer Identification Number (EIN) is also a type of TIN.


And with that, we're done with the required sections! If you submit now, your withholdings will be calculated based on the tax liability you'd have if this job was your only source of income and you take the standard deduction for your filing status (and no other tax incentives). If that sounds like you, then congratulations, you're done 😀!


Optional Fields

Let's say Alix had a few more factors affecting their tax situation for the 2020 tax year:

  • They plan to contribute $4000 to their company 401(k).

  • They'll have $300 in estimated student loan interest.

  • They are into dividend investing, and expect to make around $700 by the end of the year.

All of these would affect their tax liability, but the required sections don't factor those in, meaning there's a chance Alix will either withhold too much or too little. Since Alix wants to be in control of how much they want to pay in taxes in April, they'll use the following sections to make the necessary adjustments to withhold the proper amount.


Step 2: Multiple Jobs or Spouse Works

The situations you'd fill out this section are right in the header and essentially boils down to multiple jobs you or your household may have. The reason this matters is basically because your job calculates withholding as if that's the only job you have. Let's say you had two jobs: Job A pays you $50K, and job B pays you $25K. If you don't use this section, your withholdings will be calculated as if you were 2 people: one paying taxes on $50K, and another paying taxes on $25K. From our article on income taxes, we know that as you make more money, your marginal tax rate goes up, so you'll end up underpaying compared to the true amount you'll end up paying for the combined $75K.


Although there are 3 options given here, they all have the capability to factor in multiple jobs into your withholding (in order of decreasing complexity/accuracy). We'll go through option (a) Tax Withholding Estimator since it is the most accurate method (i.e. factors in the most about your situation) and can be used for more than just multiple jobs (e.g. investments, rental income, etc.)*. Go to the estimator here if you want to follow along!


* Note: Even though Alix only has 1 job, we're still going to go through the estimator because it'll apply to later sections. Check out the W-4 FAQ, Question 11 for a discussion on which of option (a)-(c) is right for your situation.


Withholding Estimator: About You

This first screen is almost identical to required Step 1, but there are 3 things to pay attention to:

  1. Are you claimed as a dependent? This affects which tax incentives you may qualify for, so the estimator asks for this early on to save time. In this case, Alix is not being claimed as a dependent by their parents, so we check No.

  2. How many jobs do you have that withhold income? In Alix's case, they just have 1 full-time job. This wouldn't include freelance/contract work, because they don't withhold income from paychecks (more on this in the W-9 section).

  3. Other income sources? This is a collection of other common alternative income sources. We check this box for Alix because they'll be making extra income from dividends and 401(k) contributions.

Withholding Estimator: Income & Withholding

This section is where we describe our income sources, both earned and unearned. For Alix, the 4 sections that matter are:

  1. Full-time Job Details: Remember, Alix gets paid at the end of each month, so their next pay period will end on the 31st of January, and their annual salary is $75,000.

  2. Last Paycheck Information: Technically, we don't have this because Alix hasn't gotten paid yet, so we put $0 for how much we've withheld so far/per pay period. Alix can re-fill this out after their first paycheck to see if they're on track to receive their expected refund!

  3. Tax-Deferred Retirement Contributions: In this case, Alix intends to make a $4K contribution to their company 401(k), so we'd fill that out accordingly.

  4. Other Income Sources: We'd fill this in with $700 since that's how much Alix expects to receive in dividends by the end of the year.


Withholding Estimator: Adjustments

Adjustments to income are just above-the-line deductions, and the only one that applies to Alix is:

  1. Student Loan Interest Deduction: Alix expects to make $300 in required/voluntarily payments towards their student loan interest.


Withholding Estimator: Deductions

Alix's expenses that they could itemize don't outweigh the standard $12,400 deduction, so they just indicate that here. This is often the case if you don't have a significant mortgage, charitable contribution, or other forms of tax-deductible expenses.


Withholding Estimator: Tax Credits

After exploring some of the credits they could've been eligible for, they find that none actually apply, so Alix switches to Get my results without tax credits and goes to the next page to see their results! We look at the results page in 2 parts: Your Results and Adjust Your Results.


Withholding Estimator: Your Results

This section summarizes things that are true about the current situation:

  1. Expected Tax Withholding (ETW): This is how much we'd expect to withhold by the end of 2020. Since we specified $0 withheld so far/on our last paycheck in the second screen, the estimator assumed Alix will continue to not withhold anything.*

  2. Anticipated Tax Obligation (ATO): This provides a more accurate estimate of how much you're withholdings should go towards paying than just the simple single-income, standard deduction for the required section.

  3. Estimated under payment: Since ETW < ATO, we'll end up underpaying by the end of the year, which means we'll owe a balance come tax day.

* Note: For greater accuracy, Alix should go through this estimator again after receiving their first pay stub to make sure their withholdings are what they expected, and make any necessary adjustments. It's also a good practice, in general, to fill this estimator out periodically with your latest pay stub to make sure you're on track to withhold as much as you intend to.


Withholding Estimator: Adjust Your Results

Let's say Alix wasn't happy with having to owe $9K in April, and wanted to get a $450 refund instead. This section is where they could figure out how to do just that!

  1. Slider: This is where you can specify how big you want your refund to be, in Alix's case, $450.

  2. Target Withholding: This is how much Alix will have to withhold on every monthly paycheck to reach their target $450 refund. In this case, that'd be $925.

  3. How to Adjust Withholding: This is essentially a literal how-to guide on how to adjust your withholding. It essentially amounts to (a) figuring out how to submit a W-4 form, and (b) what numbers to put in which boxes. In this case, we'd fill everything out as we did previously, but also put $201 in Step 4, Section (c), which we'll show when we get to that section*.

* Note: These $201 are in addition to the withholding you'd get if you just filled out the required sections, bringing the monthly total to $925.


That's all for the estimator! Let's head on back to the form to see what Alix has left.


Step 3: Claiming Dependents

This section is only if you have dependents, and in Alix's case, they have none, so we'll just leave this section blank.


Step 4

This section includes ways you can both increase (section (a) and (c)) and decrease (section (b)) your withholding amount. In Alix's case, since we used the estimator, we'll only fill out 4(c) with $201. If Alix didn't use the calculator, Alix could put $700 for 4(a)*, which would factor that extra income into extra withholdings from their paycheck. They'd still leave 4(b) blank, since they won't be itemizing their deductions.


* Note: This is one of the great things about the estimator; it allows you to increase your withholdings as much as you need with 4(c) without having to disclose to your employer how much you expect to make in non-job income in 4(a). This is a big win if you value privacy!


And that's all folks! After submitting this, Alix will be on track towards receiving the refund amount they're aiming for 🙌. It's good to keep in mind that you can update your withholdings at any point. You can monitor if you're on-track (i.e. by looking at your pay-stubs) and make adjustments to avoid penalties and get the refund/take-home pay you're striving for because life circumstances change, and estimates aren't perfect!


ℹ️ W-9: Verifying Basic Details (Self-Employed)

Formally called the Request for Taxpayer Identification Number and Certification, the W-9 form's purpose is essentially just that: to get a valid identification (legal name + TIN), among other pieces of basic information so that your freelance/contract employer can properly report your income at the end of the year (for more about which employee's fill out the W-4 vs. the W-9, check out this IRS guide). The key difference between the W-9 and W-4 is that your employer will not be withholding any part of your paycheck to go towards your expected tax bill. You'll still have to pay-as-you-go though, either by factoring your wages from this job into your W-4 withholdings at a full-time job or making Estimated Tax Payments yourself.


To help us go through this form, let's meet Xavier! They started their first day of their freelance assignment working for the X company on July 6th, 2020. Here is a link to the W-9 form so you can follow along* !


* Note: You might be asked to fill out this information in some online portal (e.g. Workday, Docusign, etc.), but this is asking for the same information as the raw IRS form, just with better UX.


Name

Since Xavier is not a business owner and doesn't have entities that should be explicitly ignored for federal income tax purposes (e.g. foreign entities), we'll just fill out line 1.


Federal Tax Classification + Exemptions

Though this part of the form has the most instructions, it really comes down to 3 things:

  1. Federal Tax Classification: For the purposes of W-9 filers, the only differences that matter is whether or not you are in business, and if so, what kind. Since Xavier is just an individual freelancer, they'd just choose Individual/sole-proprietor option. If they were representing a more formal organization, they'd choose the appropriate business type.

  2. Backup Withholding Exemption: Backup Withholding is essentially a punishment for not correctly filling out a W-9 form previously (e.g. incorrect name + TIN combo). If this happens, your employer is obligated to withhold 24% of your paycheck until you fix the issue. You can use this space to indicate the reason you'd be exempt from backup withholding (e.g. 5 if you're a corporation receiving dividend interest). This doesn't apply to Xavier because they're an individual freelancer.

  3. FATCA Reporting Exemption: FATCA is the Foreign Account Tax Compliance Act, and was a law put in place so that people couldn't just hide their money from the IRS by putting it into foreign banks (and similar tax evasion shenanigans). You can use this space to indicate the reason you'd be exempt from reporting income from foreign financial institutions (e.g. G if you're a REIT). This doesn't apply to Xavier because they're an individual freelancer.

Location, Requester Info, and Accounts

Again, location matters for tax purposes! Beyond that, there are a few optional spaces to put the information of the requester (i.e. X company) and the accounts numbers associated with the W-9, which Xavier leaves blank*.


* Note: Most individuals leave this blank, but you can fill these out if you want to keep a record of the accounts/entities you're filing W-9's to.


TIN

It's no wonder part of the formal title of this form gets its own dedicated section 😏. Again, since Xavier is an individual, we'll just use their SSN.


Signature

That's pretty much it! This being primarily a basic information form means that the only thing you need to do is affirm that the information you provided is accurate to the best of your abilities. Xavier is good-to-go👍🏻!


Conclusion

Hopefully, this article demystifies the W-4/W-9 and helps you make more informed tax decisions! Having a solid understanding of what these forms are and how they function in the grand scheme of taxation will help you tailor your responses to best suit your needs. Stay tuned for future articles going into the other tax forms you'll likely encounter so that you can become an income tax wizard 🧙‍♂️.


Action Items

The best thing to do next is to prepare for when you'll have to fill out these forms. There are 2 ways you can do this:

  1. Bookmark this page: you can get a lot of mileage by just having this open in another window while you go through your W-4/W-9, and falling back to the instructions within the respective forms if you have questions. 👀

  2. Fill out the form: If you expect to work full-time in the future, go through the W-4 section with your information. If you expect to do freelance/contract work, go through the W-9. Practicing getting the information necessary for these forms and knowing what each of the sections is asking for will set you up for success and lessen the stress of starting a new job. 💪

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Disclaimer: The content on Young, Not Broke is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor.

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