We will discuss the purpose of W-4 form, why is it important to you as a taxpayer, and what are the things to keep in mind while filling it, and how often should you update it.
Purpose of a W-4 form is to inform your employer about the personal allowances you are planning to claim when you file your tax return for the current year. This information will help the employer assess the amount of taxes you will owe on your wages and withhold a proper amount every pay check.
An excellent starting point to update the W-4 is to look at your tax return for last year. Did you get a refund or did you owe money to the IRS? If you received a refund, then it means your employer was withholding too much throughout the year because your W-4 information was not accurate.
When too much is withheld from your paycheck, it is like giving IRS an interest-free loan. IRS is not going to pay you any interest on your excess withholding, it will simply return your excess.