Tax Tips:

How to Fill Out Your W-2?

Your client has most likely filled out at least W-2 forms in their life. The W-2 is the form that employers use to determine how much in taxes should be withheld from your client's paycheck. Your client usually gets it when they start a new job.

Tips to keep in mind:

  • Strive to be accurate. Your client may face a $500 penalty if they end up having too little tax withheld.
  • On the form, your client claims exemptions for himself/herself, his/her spouse, and any dependents. The more they claim, the less is withheld. Your client can also claim allowances for certain deductions or credits such as the Earned Income Credit, IRA contributions and deductions, alimony deductions, the dependent care credit and the credit for the elderly or totally disabled. If they don't file this form with their employer; the employer will have to withhold taxes at the highest rate.
  • Your client should fill out a new W-2 form whenever the number of their exemptions changes or whenever their withholding allowances increase or decrease. Times when they should consider amending their W-2 are when their marital status changes, when your client has or adopt a child when a child spreads his or her wings and is no longer a dependent, or when their deductible expenses change (such as when they buy a house). In some cases, your client needs to file a new W-2 within 10 days.
  • If your client is getting married, pay particularly close attention to their withholdings. Your client may be assuming that when they get married they'll pay less in taxes. If your client and his/her spouse both work, that's likely not the case. Read up on the marriage penalty.
  • Your client doesn't have to claim all the exemptions available to him/her. The more they claim, the less will be withheld. But depending on their situation, this might leave them at the end of the year with too little having been withheld and therefore facing a penalty of some sort. If they're a careful tax planner, they'll estimate how much they expect to owe in taxes for the year and will ensure that at least 90% of that is being withheld. As a margin of safety, your client might shoot for 100% but if they notice that 140% of their anticipated tax liability is being withheld, consider tweaking their W-2.
  • Your client should be able to resubmit a new W-2 form to their employer at any time during the year. It's not something that can only be submitted once or only changed after a major life event.
  • Use the W-2 as a tool. For example, if your client expects to sell some significantly appreciated stock during the year and think their total tax due this year will be substantial, consider having more money withheld from their paychecks. This can help them avoid having to pay estimated taxes throughout the year.
  • When employers give your client the W-2 form to sign, insist that they keep the whole page—not just the bottom half, so that they may read all about what they're doing.