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Does Your W-4 Affect State Withholding?

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If you earn income by working as an employee, your employer will ask you to fill out a federal W-4 form so they can estimate the amount of federal and state income taxes to withhold from your wages each pay period. Despite your employer being able to use your federal W-4 for state income tax withholding, you have the option to use your state’s equivalent of the federal W-4 form (if one is available) to treat your state taxes differently.

IRS Form W-4

The IRS requires all employers to withhold income taxes from each of their employees’ paychecks. However, not every taxpayer will pay the same amount of income tax at the end of the year given the different tax brackets that apply to each filing status and the availability of dependent exemptions, deductions and credits. This is why the IRS allows employers to use the information reported on W-4 forms to adjust the tax withholding for each individual employee. W-4 forms use allowances as the primary means of assessing the amount of withholding an employee is subject to. The more allowances reported on your W-4, the less income tax employers will withhold. And although the W-4 is a federal income tax form, your employer can assume that your federal and state allowances are the same unless you provide a separate state W-4 form.

Your W-4 Allowances

When filling out a W-4 form, it’s best to complete the personal allowance worksheet in the W-4 instructions first. Generally, the allowances you report reduce the total wages that your employer must use to calculate withholding on. Each allowance you claim covers the personal and dependent exemptions, the itemized or standard deduction for your filing status and a number of other tax benefits, such as the child tax credit, that you anticipate claiming on your tax return to reduce taxable income.

State Income Tax Withholding

In most cases, your decision to prepare a separate W-4 for your state income tax withholding depends on whether the tax laws of your state are similar to the Internal Revenue Code. For example, the IRS doesn’t officially recognize gay marriages that some states do. As a result, same-sex couples can’t file a joint return and don’t enjoy the same tax savings that other married couples do. But if your state, such as New Jersey, recognizes gay marriage, you may be able to file a joint state income tax return. In this case, allowing your employer to use the same withholding information from your federal W-4 can result in too much state income tax being withheld from your salary.

State Tax Withholding Example

Residents of New York, for example, pay state income tax on their employment earnings and are subject to withholding. However, New York provides taxpayers with Form IT-2104, which is similar to the W-4, to report allowances for purposes of their NY taxes only. In fact, the IT-2104 instructions even caution NY residents that because of the differences between NY and federal tax law, using the IRS W-4 for NY withholding may result in inaccurate withholding. New Jersey residents face a similar situation as the state uses Form NJ-W4 for state tax withholding since the number of allowances claimed on the W-4, if applied to New Jersey income taxes, may result in insufficient amounts of withholding.

Reference: Instructions for Form W-4