The IRS encourages all taxpayers to review their federal withholding at least once a year to make sure they’re not having too little or too much tax withheld. Taxpayers can avoid a surprise at tax time by checking their withholding amount.
Below, we’ve included helpful information about tax withholding and detail on the importance of checking it:
What is Tax Withholding?
An employer generally withholds income tax from their employee’s paycheck and pays it to the IRS on their behalf. Wages paid, along with any amounts withheld, are reflected on the Form W-2, Wage and Tax Statement, which the employee receives at the end of the year.
How is Withholding Determined?
The amount withheld depends on:
The amount of income earned and
Three types of information an employee gives to their employer on Form W-4, Employee’s Withholding Allowance Certificate:
Filing status: either the single rate or the lower married rate
Number of withholding allowances claimed: each allowance claimed reduces the amount withheld
Additional withholding: An employee can request an additional amount to be withheld from each paycheck.
When Should I Check my Withholding?
Early in the year
If the tax law changes
When life changes occur:
Lifestyle – marriage, divorce, birth or adoption of a child, home purchase, retirement, filing for bankruptcy
Wage income – the taxpayer or their spouse starts or stops working or starts or stops a second job
Taxable income not subject to withholding – interest, dividends, capital gains, self-employment and gig economy income, and IRA distributions
Itemized deductions or tax credits – Medical expenses, taxes, interest expense, gifts to charity, dependent care expenses, education credit, child tax credit, earned income tax credit
How Can I Check My Tax Withholding?
Taxpayers whose employers withhold federal income tax from their paycheck can use the IRS Tax Withholding Estimator to check their withholding. This online tool guides users, step-by-step through the process of checking their withholding, and provides recommendations to help aim for the withholding amount that’s right for them.
Individuals should generally increase withholding if they hold more than one job at a time or have income from sources not subject to withholding. If they don’t make any changes, they will likely owe additional tax and possibly penalties when filing their tax return.
Individuals should generally decrease their withholding if they qualify for income tax credits or deductions other than the basic standard deduction.
Either way, those who need to adjust their withholding must submit the new W-4 information to their employer as soon as possible since withholding occurs throughout the year.
Why Check Tax Withholding?
There are several important reasons to check your tax withholding.
It can protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time.
It can let you adjust your tax withheld up front, so you receive a bigger paycheck and a smaller refund at tax time.