How to Adjust Your Tax Withholding

Posted On: Friday, August 26, 2022

Tax Withholding Adjustments Can Save You Money Now and Avoid Penalties Later

Tax Withholding Adjustments Can Save You Money Now and Avoid Penalties Later

While you may only think about your income tax on or around tax day, in actuality, the Internal Revenue Service (IRS) requires that employers withhold taxes from your paycheck throughout the year – otherwise known as withholding.

When you got your job, your employer likely had you fill out a W-4 form. The W-4 determines how much income tax your employer pays to the IRS on your behalf each pay period, based on aspects like your filing status and the number of dependents.

But what if you suspect that your W-4 needs updating? What if you suspect that you’re having too much or too little income tax withheld every pay period? Reviewing and adjusting your withholding is an exercise every employee should undertake periodically throughout the year.

The Withholding Form

The IRS introduced a brand new Form W-4 beginning with the tax year 2020 that can streamline the process of calculating how much income tax to withhold from your paycheck. The new form is aligned with changes made by the 2017 Tax Cuts and Jobs Act (TCJA), which eliminated the personal exemption, which was tied into the allowances you could claim on the old form.

The new W-4 form aims to make the process of withholding taxes simpler. It uses a question-and-answer format. You can use it to adjust your withholding upward or downward.

Calculate Your Withholding More Accurately

You can calculate how to adjust your withholding by preparing a projected tax return for the year. Use the same tax forms you used last year, but substitute this year’s tax rates and income. Calculate your income and deductions based on the income you expect for this year, then use those amounts to determine your projected tax.

The IRS website has a withholding calculator that you can use to determine the recommended withholding amount for your personal situation. The number of dependents you support is a crucial component of your analysis, as is the number of income streams.

Calculating Your Total Tax Withholding for the Year

To figure out how much federal income tax you’ll have withheld from your paycheck this year, multiply your new withholding amount per pay period by the number of pay periods remaining in the year. Then add in how much federal income tax has already been withheld from your paycheck this year. This total represents approximately how much money will be taken out for federal income taxes.

Now, let’s compare your total withholding to your tax liability projection. If you’ve withheld more than you owe in taxes, you can expect a refund when you file your return. If you’ve withheld less than you owe in taxes, you might have to make an estimated tax payment or pay additional taxes when you file your return.

Remember, your withholding and tax liability amounts are approximations. If they’re not too far apart, you’re close to where you need to be. You can always change your withholding at any time during the year if a change in your circumstances would result in more or less tax owed.