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Impact of W-4 allowances on paycheck

This example demonstrates how the number of allowances you enter on your W-4 can impact on your paycheck and taxes. Created by Sal Khan.

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  • male robot hal style avatar for user Aidan Iannello
    2 questions:
    1) Can you have 0 allowances?
    2) If one of the three things listed in Line B apply to you and you put down a zero anyway, is that lying on a government document and do you get in trouble for that?
    (17 votes)
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  • blobby green style avatar for user mike.delagrange
    Good morning Khan,

    This year when I did my taxes I ended up getting a lot less in my Federal taxes than I did last year. I had been claiming 1 dependent for my wife, daughter and I, however she is 25 and I am no longer to claim her.

    Therefore, since I should earn roughly 25% more this year than I did last year, I was thinking of dropping from 1 claimed dependent to 0 claimed dependents on my W4 & G4. If I do that how big of a hit (percentage wise) should I see in my take home pay?

    Thanks Khan! If you can provide any advise I would appreciate it!

    Have a great day!

    Best regards,
    (5 votes)
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    • blobby green style avatar for user Mike Bouve
      Hey Mike,
      From what the video states, the more allowances the greater withholding and the fewer allowances, the less withholding. If you go from a 1 on your W4 to a 0 your Net pay for each paycheck should increase. I hope this helps!
      (4 votes)
  • blobby green style avatar for user 😊
    How do you calculate the taxable income in case of 0 allowances? and what would be the standard deduction if someone makes less than 6500$?
    (4 votes)
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  • blobby green style avatar for user leffg2
    How do you calculate the taxable income in case of 0 allowances? and what would be the standard deduction if someone makes less than 6500$?
    (3 votes)
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  • leaf green style avatar for user 20clautensleger
    How do you calculate the taxable income in case of 0 allowances?
    (2 votes)
    Default Khan Academy avatar avatar for user
  • blobby green style avatar for user Gage Rottum
    Can the percentage change?
    (1 vote)
    Default Khan Academy avatar avatar for user

Video transcript

- [Instructor] Now let's dig a little bit deeper and explore how your paycheck is actually affected in terms of the numbers depending on how many allowances you pick and for the sake of this video, I will stick with the single individual making $40,000 a year. Obviously circumstances would be different, you'd have a different number of allowances if you have someone who's married, filing jointly or they have more dependents than what we're talking about in this video. And what we're gonna look at is what will the paycheck look like and what will the withholdings look like if the person elects to have one allowance, so they only put this one right over here in line A or if they wanna have two allowances 'cause they could put a one over here because they are single and they have only one job, or we're assuming they have only one job. So, let's go into the numbers a little bit. So, we're assuming that we start off with, at least from this employer, gross income that the employer knows about, so the income is $40,000. $40,000. And actually, let me do two cases here. So, this right over here would be the case of one allowance, on allowance and over here, the case, I'm gonna have two allowances. Two allowances. So, once again, the two allowances won't change what the actual gross income is, so it's $40,000. And regardless of how many allowances are filled out on the W-4 Form, we're gonna pay the same amount in Medicare, social security tax. So, let me fill that out. So, Medicare which is going to be 1.45% of this income, so it's 1.45% is going to be, let me get my calculator out, so let's see, 40,000 times 1.45% is the same thing as 0.0145 is going to be $580, so I'm gonna pay 580, let me align the, so minus $580, I'm gonna do that in either case, that's not dependent on the allowances and now let's calculate social security. So, social security tax. This is going to be 6.2% and these are all the rates at the time of making this video. If you see this, if you watch this video at a different year, I encourage you to look up the rates that are relevant in that year. So, 6.2%, once again you're gonna pay on the $40,000. Get the calculator out again. So, 40,000 times 0.062, that's the same as 6.2%. That gets us to $2,480, so minus $2,480, minus $2,480 and now let's calculate what the federal income tax is and so, in order to figure out federal income tax, so this is, so so far, these are things that you're paying regardless of what the allowances are but now let's, the allowances are going to start to factor in when you think about your federal income tax. So, let's do taxable income. Taxable, actually let's do it this way. So, we're gonna start with our gross income. Now this person is going to get the standard deduction and for a single person in the year that I'm making this video, the standard deduction is $6,200, so let me write it over here. Let me do it in a new color. So, standard deduction. Standard deduction and the things I'm going to list now, the standard deductions and the amount you get for your allowances, these are things that are gonna lower your taxable income, so your standard deduction is $6,200, that's true of regardless of how many allowances you pick and then allowances. This is going to be the key difference, allowances, allowances, and so, you're gonna lower your income at least in the year that I'm making this video by $3,950 per allowance. Per allowance. So, if you have one allowance, you're going to reduce your income by $3,950. If you have two allowances, it's gonna be two times that, so it's two times 3,950, so let's see, that's two times 4,000 would be 8,000 and it's gonna be 100 less than that, so it's going to be $7,900. Did I do that right? Yeah, that's $7,900. Excuse me, I had something in my throat. So, let's see, 7,900, it still feels like it's in my throat but I will power on. So, once again these are your allowances and so, now based on this, then once again, this is all your employers, this isn't us doing our taxes, this is our employer estimating how much taxes we'll have to pay but your employer doesn't know about other things going on in your life, donations that you might be making to charity or income that you might be getting from other sources, from investments or whatever else, this is just what the employer knows based on how much it's paying you and what you filled out in the W-4 Form. And so, based on the gross income up here and the standard deduction in the allowances, we can then come up with your employer's estimate of your taxable income. So, taxable income, taxable income in this situation, and if you only have one allowance, it's going to be your gross income, $40,000 minus the standard deduction, $6,200 minus 3,950. 3,950 gets us to 29,850. 29,850. Now if you have two allowances, it's going to be well, you could say we're gonna subtract another 3,950, you take 40,000 minus 6,200 minus 7,900, well, that's just, let me just do that, so it's 40,000, one, two, three, minus the standard deduction, once again we're adjusting our gross income to taxable income, minus two times this, so 7,900 for two allowances. If you had three, or four or five allowances, then you would be subtracting that multiple of 3,950 here. And so, you have 25,900. 25,000, 25,900 and so, now we can figure out how much tax this person's going to pay and we've already done videos and I encourage you to watch those videos on the progressive tax system where the first X dollars you pay a lower rate and then you have incremental brackets and for those incremental dollars, you pay higher and higher rates and at the time of making this video, the first $10,000, you're gonna pay 10%. So, this tax, let me just write the taxes right over here, so taxes and I'm only gonna calculate federal income taxes, state income taxes vary but your employer also typically withholds first day income taxes as well but your taxes are your federal, let me write this, the federal taxes, it's going to be 10% on the first, on first, on the first $9,075 and then it's gonna be 15% on the amounts to this. The bracket goes into 36,000 and some change but we're below that obviously and so, it's gonna be 10,000 on the first and then 15% up to the figures given here, up to the figures given here because they are in the 15% tax bracket. That bracket, as I said, it's actually let me look it up. I'll pause the video, I'll look it up for you. So, just looked it up. It's right now it's 15% up to 36,900, so let me write that. 36,900 and clearly these are within that range, so based on that, let's actually calculate what the federal taxes are going to be for each of these scenarios, so the first, so you're gonna pay in the first scenario with one allowance, you're gonna pay 10%, so .1 times the first 9,075, that's actually pretty easy to calculate, it's gonna be $907.50 but I'll just write that, times 9,075 and then you're going to pay 15%, .15 on the next increment, times this amount, 29,850 minus 9,075, 9,075. Remember, it's only the incremental amount. Minus 9,075 gets us to 4,023.75. 4,023.75. So, that's the federal, or the estimated federal taxes that your employer is estimating in this scenario and in this scenario, it's going to be, get it back and essentially I can do the same exact, let me just do that same thing that I just typed in, but instead of the 29,850, it's now 25,900, 'cause it's lower now 'cause I know have two allowances instead of one and it is going to be, it gets us to be 3,431.25. 3,431.25. So, now we can estimate what the or this is going to be your employer's or the person's employer's estimate of what they get. So net to employee and I should say estimate. Estimate of net or this is actually what's going to paid to net to the employee but it's based on an estimate of likely taxes. Net to employee. Net to employee is going to be, so let's get our, just get all of our information out here. It's going to be, it's gonna be the $40,000, that's your gross income, $40,000 and I'm doing the case first with one allowance minus the $580 in Medicare taxes minus the $2,480 in social security taxes and this is what you're gonna pay regardless of how many allowances, so let me start with that, so 36,940, so that's after paying Medicare and social security taxes and then if you have one allowance, you're going to have the federal income taxes of $4,023.75, so that's minus 4,023.75 gets us 32,916.25. So, let me write that down. That is 32,916.25. So, once again, this is your employer's estimate of what you should be getting after you pay your taxes. Once again, your employer does no know about other sources of income, investments that you might have or donations to charity or whatever else and so, on a biweekly basis, if they pay you every two weeks, since there's 52 weeks in a year, they'll pay you 26 times a year, they'll pay you 126 of this and we'll actually calculate this in a second but before we do that, let's actually calculate the situation where you have two allowances we also saw that after paying for Medicare and social security at 36,940, so let's do that again, 36,940 and then now subtract your lower, let's subtract your lower taxes 'cause you had two allowances, so you had lower or estimated lower taxable income, so 3,431.25, 33,508.75. So, this is 33,508.75. And so, on a per paycheck basis and remember, the whole point of this is to see how your allowances affect your actual paychecks, affect your actual paycheck, let's get the calculator back, so this second one, if we divide by 26, so assuming you have 26 pay periods in a year, each paycheck you're gonna get 1,288.80. So, 1,288.80, so that's gonna be your biweekly paycheck while in this sense, so let me write this, paycheck, so assuming every other week, so 26 per year, and in the one allowance circumstance, it's going to be 32,916.25 divided by 26, divided by 26, gets us 1,266 and if we round up, a penny. So, 1,266.01. Did I do that right? 1,266.01 if we were to round. So, roughly speaking, that extra allowance for this individual right over here has resulted when they put the extra allowance, they get a little bit over $20 more per paycheck which amounts to a little more than $40 per month and of course, it's not just free money. If at end of the year it turns out that if, at the end of the year, if they ended up paying this much in taxes, but it turns out that they actually should have paid this much in taxes, then come before the tax deadline, they're going to have to pay the IRS the difference. Now, on the other hand, if they pay this much, if this much is withhold but they didn't have to pay that much, they're going to get a refund and really that's up to that person to decide how conservative or aggressive they wanna be on that issue.