Is It Better to Claim 1 or 0 for Taxes?

Federal income tax is regularly deducted from employee paychecks through a process called tax withholding. This system helps individuals meet their annual tax obligations throughout the year, preventing a single large payment at tax time. Employees influence how much federal income tax is withheld by completing and submitting a Form W-4, the Employee’s Withholding Certificate, to their employer. This form provides information employers use to calculate the appropriate withholding amount. While the W-4 no longer uses “allowances,” the concept of adjusting withholding to have more or less tax taken out, similar to claiming zero or one allowance, remains relevant.

Understanding Withholding Allowances

The Form W-4, or Employee’s Withholding Certificate, is an IRS document employees provide to their employers. It instructs the employer on how much federal income tax to deduct from each paycheck. The W-4 helps employers calculate the correct tax amount to send to the IRS on your behalf. Before 2020, the W-4 form used “withholding allowances” as a numerical factor to reduce the amount of federal income tax withheld. More allowances meant less tax withheld and more take-home pay, while fewer allowances meant more tax withheld and less take-home pay. The Tax Cuts and Jobs Act of 2017 eliminated personal exemptions, leading to a redesigned W-4 form in 2020 that removed the concept of allowances. The current W-4 form now focuses on factors like filing status, dependents, multiple jobs, and other income or deductions to determine withholding. However, the underlying principle of adjusting withholding to have more or less tax taken out, similar to the old “claiming zero or one allowance,” still applies.

Implications of Claiming Zero Allowances

Setting your W-4 to effectively maximize federal income tax withholding, similar to claiming zero allowances, generally results in more tax being deducted from each paycheck. This approach means that more of your earnings are sent to the IRS throughout the year. This strategy often leads to a larger tax refund when you file your annual tax return, as you have likely overpaid your tax liability. It can also result in a smaller tax bill, or no bill, if you have other income sources or significant deductions.

Some individuals use this method as a forced savings mechanism, ensuring a lump sum is available at tax time. The trade-off is less take-home pay throughout the year. This approach is advisable for individuals with complex financial situations, such as those with multiple jobs, self-employment income, or large amounts of taxable unearned income, as it helps prevent underpayment penalties.

Implications of Claiming One Allowance

Setting your W-4 to effectively reduce federal income tax withholding, similar to claiming one allowance, typically results in less federal income tax being withheld from each paycheck. This means more of your gross pay is included in your regular take-home earnings. The exact impact on your paycheck depends on your tax bracket, pay frequency, and filing status.

This approach offers increased cash flow throughout the year, as you receive more money with each pay period. However, a potential outcome is a smaller tax refund, or even owing taxes at year-end, if the amount withheld is insufficient to cover your actual tax liability. This strategy is appropriate for individuals with simpler tax situations, such as those with only one job and minimal additional income or deductions, or for those who prefer more immediate access to their earnings.

Adjusting Your Withholding

To change your federal income tax withholding, complete and submit a new Form W-4, Employee’s Withholding Certificate, to your employer. This form is available from your employer’s human resources or payroll department, or from the IRS website. The W-4 has several steps to help you accurately determine your withholding.

Step 1: Personal Information and Filing Status

Provide your personal information and filing status (e.g., single, married filing jointly, head of household).

Step 2: Multiple Jobs or Working Spouse

This step is for individuals with multiple jobs or those married filing jointly with a working spouse, ensuring all income sources are considered.

Step 3: Dependents

Account for dependents to claim relevant tax credits, such as the Child Tax Credit.

Step 4: Other Adjustments

This step allows for additional adjustments, such as reporting other income not subject to withholding (e.g., interest or dividends), claiming itemized deductions beyond the standard deduction, or requesting an additional dollar amount to be withheld.

Once completed, sign and date the form and submit it to your employer’s HR or payroll department. Changes typically take effect within one to two pay periods. The IRS also provides a Tax Withholding Estimator tool on its website to help determine the most accurate withholding amount.