Why Do I Owe Taxes if I Claim 0 on my W4?

When you start working for an employer, they need to calculate the appropriate federal income tax withholding from your paycheck. For this, you need to fill a W4 form, including your exemptions and allowances. You may ask yourself, "do I claim 0 or 1 on my W4?" In theory, the fewer allowances you claim, the less money you owe the IRS.

Sometimes, though, you may claim 0 allowances on your W4 but still owe taxes. Here, we will talk about why you owe taxes despite claiming 0 on the form.

What is a W-4 Form?

An IRS W-4 tax form is a form an employer uses to determine how much federal income taxes they need to withhold from an employee's paycheck. This form includes the number of allowances and personal exemptions you will receive on your payday. You need to fill this form the day you join a company.

Your employer uses this W4 form until you fill a new one. You often need to fill a new W4 when your financial position changes. This form is important because it tells the accountant of the company how much your paycheck adds up to.

If you claim more allowances, your employer withholds a smaller amount from your paycheck. You then receive more money. However, this also means that you will not get a refund, and you may even owe some money to the IRS. Claiming few or no allowances means you will be eligible for a refund.

You can either hire a CPA to handle your taxes or do them yourself. Either way, knowledge of how a W4 form works is necessary.

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How Many Allowances Should You Claim?

The number of allowances you should claim depends on some personal circumstances. This includes relationship status, children, and how long you have been at a job.

The best idea is to find a balance. You should not claim too many allowances, or you might end up having to pay the IRS. Claiming 0 allowances means that too much money will be withheld by the IRS.

The allowances you can claim vary from situation to situation. If you are married with a kid, you can claim up to three allowances. If you want a higher tax return, you can claim 0 allowances. If you are married and have two kids, you can claim three or more allowances.

If you are single, you can claim 1 allowance. If you have one job, you can request 2 allowances. If you are single with a kid, you can claim 2 allowances. However, you should always be cautious of the tax return.

With 2 kids, when you are single, you can claim 2 allowances. For more than two kids, you can claim an additional allowance for each kid.

A married couple with no children can claim 1 allowance each. You should note that if someone else mentions you as a dependent, you will not get any allowances.

In the case of children, you can claim up to $1,000 per child tax credit provided that they are under 16.

Why Do I Owe Taxes If I Claim 0?

If you claimed 0 and still owe taxes, chances are you added “married” to your W4 form. When you claim 0 in allowances, it seems as if you are the only one who earns and that your spouse does not. Then, when both of you earn, and the amount reaches the 25% tax bracket, the amount of tax sent is not enough. You will hence need to pay the IRS some money.

The amount of income you and your spouse earn combined goes too close to the standard deduction, which does not contribute to under-withholding. With two W2s, a doubling of the tax bracket occurs, resulting in insufficient tax credits when claiming 0 allowances.

Another thing that can lead to you owing taxes is if there is a huge disparity in income.

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How to Fix This Problem

One thing you can do if you owe taxes after claiming 0 is to set your status to single. You can also request additional withholding on your W4. To do this, use M-0, M-0 on Line 6, or use this tool.

You and your spouse can also use Single withholding tables. For this, check the “Married but withhold at higher Single tax rate.” Then, there is a chance you can utilize S-2, S-2. This way, instead of the married tax bracket, the IRS will see your withholding tax using the Single bracket. This is half the amount of the married bracket.

To ensure that you will not owe taxes, divided next year’s income by this year’s income. Multiply the amount by the tax rate. Divide this number by the number of paydays remaining in the year. Enter the amount you get in Line 6 of the form.

Should I Claim 0 or 1 if I am Married?

As mentioned above, claiming 0 when you are married may result in your combined income reaching the tax bracket. You will then owe some taxes. A good option, therefore, is to claim 0 with an additional amount withheld.

You can also claim single and 1 allowance or single and 0 allowances to make up for this amount.

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How to Owe Nothing on Federal Tax Return

To owe nothing on federal taxes, you need to pay attention to your W4 form and make the necessary estimations and adjustments. You need to keep in mind that you can submit a W4 form whenever you want.

You need to make sure you do not have too much or too little withheld. Try to control how much your employer withholds.

First, you need to know how much tax you owe at all times. For some people with a salaried job, this is an easy task. For freelancers and people with flexible incomes, this can be a challenge. Luckily, there are some tools you can use. These include:

Tax Withholding Estimator
Online Check Calculator
Sample Tax Return

After you know your tax amount, you can distribute it among paydays to know what withholding tax amount you need to reach a target. You can then ask the accounting department for a new W4 form and fill it accordingly.

If you see that the withholding amount is low, calculate the additional amount of tax you want to be withheld and add it to the form. If the withholding amount is too high, you can increase the allowances you claim on the W4 form accordingly.

One thing to keep in mind is that your withholding tax needs to be 90% of your current year’s tax liability. This way, you will avoid underpayment penalties.

Following these steps will help you to bring your tax return to a suitable, balanced number. If done right, you can bring the federal tax return to 0.

Is it Better to Receive a Refund or Owe More Taxes?

According to most financial experts, it is better to owe taxes than to receive a refund. Even though getting a refund means you earn some extra cash, it also means that you overpaid. In the process, you gave the government a loan on which you do not even receive interest.

Instead of giving your money to the government, it is better to keep it and spend it on more important things. By owing taxes rather than getting a refund, you have more control over your money.

Others maintain that getting a refund is better, but only if it is small. This is because a small refund will mean there will not be any penalties. In such a case, having some extra money instead of struggling to pay taxes is a better option.

What If I Don’t Submit My W4?

If you fail to submit your W4 form, taxes will still be withheld from your paycheck. Without your specific details, your employer will apply a default withholding rate for a single individual with zero allowances. This can work if these details match your actual circumstances, but if you are married with kids and need more allowances, it can turn out to be unfavorable.

Additionally, if you want to manage your W4 form to balance the amount of withholding tax you owe, you need to submit a W4 form every time your income or financial position changes.

Not submitting a W4 form can result in overpaying and underpaying, which can put you at a disadvantage.

Conclusion

You may owe taxes even if you claim 0. This occurs when you set your relationship status as “married,” giving the impression that you are the only one who works. Combined, the income surpasses the tax bracket, resulting in a higher tax. To avoid this, you need to file as Single or Single with additional withholding tax to potentially gain tax benefits.

You should always keep track of how much income tax you owe so you can add allowances and withholding tax accordingly. This way, you can strike a balance, avoid overpaying and underpaying and avoid any kind of penalties placed by the IRS.

Final Thoughts

If any of the information provided above made you feel confused, don’t stress because you are not alone. There are many other businesses that have faced similar problems in the past. However, with time, they have fared well with just a little help.

If you are struggling or just don't have the time to keep up with it, it may be time to have Hall Accounting take over and invest with accurate accounting records and financial reports. The Hall Accounting team will manage your records from start to finish and make sure all adjustments are timely recorded. This option is also feasible for small businesses because it is cheap and hassle-free, at a fixed monthly rate. If you are interested, please feel free to email us at proposals@hallacctco.com and we will get you a free quote!

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