Check Your Withholding
Are you having the right amount of tax withheld from your paycheck? The IRS’s Tax Withholding Estimator helps you calculate federal tax withholding, which affects your take-home pay as well as your tax refund or tax due. To use the estimator, you’ll need paystubs from your job(s). Be sure to include your spouse’s job and any other income information, such as side jobs, self-employment and investments. It’s good to have your latest tax return handy as well.
It’s important to know that the estimator won’t work if you have nonresident alien status; instead, read Notice 1392, Supplemental Form W-4 instructions for Nonresident Aliens. Also, if your tax situation is complicated, including alternative minimum tax, you should use Publication 505, Tax Withholding and Estimated Tax.
If you do use the estimator, the results will help you decide whether to retain your current withholding or change the amount. To change it, enter your new tax withholding amount on Form W-4, Employee’s Withholding Certificate. (Your employer may want you to submit it through an automated system.)
The Tax Withholding Estimator never asks for personal information like your name, Social Security number, address or bank account numbers. None of the information you enter is saved.
Life changes
There are many reasons why you might need to change the withholding on your W-4. Among them are major life changes such as:
- A new job or other paid work
- A change in total income
- A change in marital status (if you are married as of Dec. 31, for tax purposes you are considered married for the whole preceding year)
- A new child in your life
- A new home
When you change your tax withholding midyear, check it again at the end of the year and adjust it as needed with a new W-4.
Life changes may also lead you to alter the amount withheld from pension, annuity and individual retirement account payments. This is done through Form W-4P, which you submit to your employer.
Remember that the W-4 is for federal withholding only. For state tax withholding, contact your state’s tax agency.
Changing your withholding
Updating your W-4 may be a good move, but it is helpful to be prepared for the consequences. The amount of withholding changes how much cash you take home now and how much you owe later in taxes.
For example, you may put more cash in your pocket now but be met with a larger tax bill later. Or you may choose more withholding now and perhaps receive a refund at tax time. The IRS reports that about 70% of taxpayers prefer to overwithhold now and get the refund. (The average refund is more than $2,700.) Getting a tax refund can incentivize better tax planning to optimize withholding levels.
What if you don’t have a W-4?
Here are some considerations if you don’t have a formal employer:
- If you have lost your job, IRS Publication 4128, Tax Impact of Job Loss, explains the tax ramifications of such things as severance pay and unemployment compensation; payments for any accumulated vacation or sick time; withdrawals from your pension plan; job hunting and moving expenses. You will also want to consider making estimated payments so that you don’t have a large amount of tax due in April.
- If you own or are starting your own business, see IRS Publication 334, Tax Guide for Small Business.
- If you are a member of the gig economy, you may need to consider making estimated tax payments as you earn income; this will help you avoid a large balance due or penalties.
- If you have income from part-time, temporary or side work, or if you are paid in cash, property, goods or virtual currency, it is essential to report all income and pay estimated taxes as necessary.
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