Understanding the W-4 Tax Form

Form W-4 is called the Employee's Withholding Allowance Certificate and is used by the employer to determine how much money to withhold for taxes each pay period. Employees have to fill out the W-4 form with each employer and possibly every tax year.

How many types of withholdings are there?

There are two types of withholding of taxes:

1. mandatory withholding and
2. voluntary withholding

What is mandatory withholding?

Examples of mandatory withholdings are:

• Withholding of salaries and wages
• withholding of gambling winnings
• withholding of interest and dividends

Certain types of gambling winnings are subject to mandatory withholding. Usually tax will be withhold from gambling winnings of more than $5,000. It doesn't matter if the gambling winnings are paid in:

• cash,
• property or
• annuity.

If the gambling winning exceed $5000 then the entire amount you won is subject to tax withholding.

What income are not subject to tax withholding?

Gambling winnings from bingo, keno, and slot machines are usually not subject to income tax withholding. If you receive $600 or more in gambling winnings the payer is required to issue a Form W-2G Certain Gambling Winnings. If your winnings are subject to mandatory withholding then the amount twill be shown in box 2 of the form W-2G. This withholding is added to the withholding on W-2 form and entered on 1040 line 64.

Interest and dividends are usually not subject to withholding. However if the taxpayer fails to give the payer (bank or mutual fund company) his or her social security number or if he or she gives an incorrect social security number, the payments are subject to mandatory withholding. This is also called backup withholding and is shown in box 4 of form 1099-INT or form 1099-DIV.

What is Voluntary withholding?

If the taxpayer receives income from social security benefits or unemployment compensation, he or she can choose to have income tax withhold from the payments. To do so, the taxpayer needs to fill out the form W-4V Voluntary withholding request.

Social security benefits are reported on form SSA-1099 Social Security Benefit Statement and the voluntary withholding is shown in box 6.  The taxpayer can choose to have 7%, 15% or 25% withhold from each payment. No other percentages or amounts offered. Box 4 of form 1099 G Certain Government Payments shows the taxes withheld from your unemployment compensation. For unemployment compensation, the payer is permitted to withheld 10% from each payment. No other percentage or amount allowed.

For most private retirement income, federal income tax will be withheld unless the taxpayer chooses not to have it withheld. To not have any amount withheld you must file the form W-4P Withholding Certificate for Pension or Annuity Payments with the payer of your retirement benefits.  If income tax is withheld from retirement income, the amount is shown in Box 4 of form 1099-R Distribution from pensions, annuities, retirement or profit sharing plans. IRAs insurance contracts, etc which reports retirement distributions made to you.