Guide to the W-4

Looking forward to a tax refund is a tradition for many people. (It certainly beats getting a bill to pay.)

But skipping the refund, or part of it, and accelerating the cash into your paycheck could help you reach some financial goals. For instance, with more cash available throughout the year, you can have more to spend, save, and even contribute to tax-advantaged investment accounts.

Unlike IRAs which can accept lump sum contributions, 401(k)s and health savings accounts (HSAs) offered by employers require salary deferrals—so your contribution is taken out of your pay before you get it. Retirement accounts like 401(k)s have an annual contribution deadline of December 31. The deadline for HSA contributions is Tax Day of the following year.

Why give the government an interest-free loan?

If you have been getting a large tax refund, that means you have been effectively giving the government an interest-free loan. Instead, consider lowering your withholding to free up money to spend or save in tax-advantaged accounts like a 401(k) or HSA.

Saving a little bit more in tax-advantaged accounts can lead to significant benefits in retirement. Read Fidelity Viewpoints: Just 1% more can make a big difference

All it takes is reviewing and filling out Form W-4 Employee Withholding Certificate.

What is the W-4?

IRS Form W-4, Employee’s Withholding CertificateOpens in a new window, tells your employer how much to withhold from your paycheck for taxes. It includes information about the size of your family, how much income you earn from different sources, and potential deductions you might claim that could lower your tax bill. You can fill out the form more than once. In fact, it may make sense to revisit the form every year or before any life events that could affect your taxes—like getting married, adding children to your family, or buying a house.

If you anticipate your W-4 might be complicated, consider speaking with a tax professional, as withholding too little can result in fines and penalties.

How to fill out your W-4

Withholding too much tax from each paycheck can lead to a big refund. Not withholding enough can result in a tax bill or even penalties for underpaying throughout the year.

For some basic tax situations, the IRS has a tool that can help you fill out the W-4 and provides a downloadable copy you can give to your employer: Tax withholding estimatorOpens in a new window. You’ll need your most recent paystub, details about any other sources of income, and your most recent tax return. It may be best to use this tool at the beginning of the year.

Here are the steps to filling out your W-4 on your own.

Step 1: Enter personal information

This section asks for your identifying information and your anticipated tax-filing status. If you’re single at the beginning of the year but plan to get married, for example, you could check "Married filing jointly" so that your withholding will be a more accurate estimate for the entire year.

For single filers with no dependents or other sources of income, and who take the standard deduction, nothing else needs to be done. Sign and date, case closed.

Step 2: Multiple jobs or your spouse works

If you have multiple jobs and/or your spouse also works, this section gives you some options for your withholding. There are 3 ways to go about it.

• Use the tax withholding estimator on IRS.gov.
• Use the worksheet on page 3 of the W-4.
• Check box C if there are only 2 jobs and the pay from the lower-paying job is more than half that of the higher-paying job.

Step 3: Claim dependents and other credits

This step helps you figure out the amount of the tax credits you may be able to claim for children and other dependents. You also can include other tax credits for which you are eligible, such as education tax credits. Including these credits will increase your paycheck and reduce the amount of any refund you may receive.

To read more about tax credits, visit Learn: Managing taxes and scroll down to find "Tax credits."

Step 4: Other adjustments (optional)

Step 4 is optional, but it is where you can fine-tune your withholding based on your complete financial situation. If you typically owe money when you file your taxes, you can withhold additional tax from your pay each pay period. This will reduce your paycheck and either increase your refund or reduce any amount of tax you owe.

Step 5: Sign and date

To let your employer know how much to withhold, sign and date the form and then submit the form to your employer. If you’ve found that you want to make further changes, just fill out the form again.

Aim for incremental changes at first

If this is your first time adjusting your withholding, consider starting with a portion of your refund instead of the entire amount. While some may want to withhold as close to the correct amount as possible, you can still take advantage of this strategy without being perfect—and starting small may help avoid a situation where you under-withhold. The IRS imposes penalties and interest for underpayment throughout the year so it’s important to understand your tax and financial situation.

As always with complicated financial topics, it can make good sense to work with a tax or financial professional to help you make decisions about your specific circumstances.

Ideas to consider instead of a refund

Consider this example. A hypothetical taxpayer plans to reduce his monthly withholding by $83 to trim his refund by $1,000. To make the most of his extra savings, he considers 3 options, in no particular order.

• Building his emergency savings account using a highly liquid investment in a taxable brokerage account. Fidelity suggests emergency savings of at least $1,000, which can be built up over time to an amount that could cover essential expenses for 3 to 6 months.
• Saving and investing in his HSA, which offers potential tax breaks as long as the money is used for qualified medical expenses. Plus, it offers long-term growth potential since the money can be invested. It’s known to be “triple” tax-advantaged.¹ Contributions made through his employer are taken out of his paycheck before Social Security and Medicare taxes (aka FICA) are taken out.
• Contributing to his workplace retirement account, which would get a match from his employer in this case and offers long-term growth and compounding potential. He will need to leave the money in the account at least until age 59½ in most cases.