An employee completes an IRS W-4 form, or an Employee's Withholding Allowance Certificate, to indicate his tax situation to the employer. The W-4 form tells the employer the correct amount of tax to withhold from an employee's paycheck based on the employee's marital status, number of exemptions and dependents and other factors.
The employee fills out seven lines of the W-4 form. The first few lines include the taxpayer's name, address and Social Security number. The worksheet above the form lets the taxpayer estimate the amount of allowances on his tax withholding. Increasing the amount of allowances reduces the amount of money withheld from the paycheck. A person can claim an exemption from withholding any money if he did not have a tax liability during the previous year and expects to have zero tax liability in the next year.
The worksheet starts by letting the taxpayer add one allowance if he cannot be claimed as a dependent on someone else's income tax return. The employee can take another allowance if he's single and has just one job, is married with one job and the spouse doesn't work, or has wages from a second job within the family totaling less than $1,500. He can take another allowance if his spouse doesn't work.
The employee adds the number of dependents into the withholding amount. Dependents are children, adult relatives who don't work or elderly people living with the taxpayer. The worker can take an allowance for filing as head of household if he is unmarried and makes more than 50 percent of the household's income.
The employer then calculates how much to withhold from a paycheck based on the allowances calculated on Form W-4. The money withheld goes to the Internal Revenue Service (IRS) after each paycheck.