Importance of Checking your Tax Withholding

The IRS recommends that all taxpayers review their federal withholding at least once a year — and more often whenever life circumstances change.

Getting your withholding right protects you from an unexpected tax bill at filing time and can also mean a larger paycheck throughout the year rather than waiting for a refund.

Here’s what you need to know about tax withholding in 2026.

What is Tax Withholding?

Tax withholding is the amount your employer deducts from each paycheck and remits directly to the IRS on your behalf.

At year-end, the total wages paid and taxes withheld are reported on Form W-2, which employees use to file their annual income tax return.

For the self-employed or those with side income, withholding may not cover all taxes owed — making it especially important to monitor.

How is Withholding Determined?

Your employer calculates withholding based on two primary factors:

1. The amount of taxable wages earned during the pay period
2. The instructions on your most recent Form W-4, including filing status, dependents, additional income, and any extra withholding requested

The 2020 redesign of Form W-4 eliminated withholding allowances and replaced them with a more transparent system.

In 2026, this updated format remains in effect, and employees who haven’t reviewed their W-4 recently should do so to ensure their withholding reflects their current situation.

When Should You Check Your Withholding?

The IRS recommends reviewing your withholding:

• Early in the calendar year, ideally January or February
• After any major tax law change
• When significant life events occur

Common life events include:

• Marriage, divorce, or a change in filing status
• Birth or adoption of a child
• Purchase of a home or other major deductible event
• Starting or stopping a second job, or your spouse changing employment status
• Receiving significant investment income, gig economy earnings, or retirement distributions
• Changes to itemized deductions or tax credits, including the Child Tax Credit or Earned Income Tax Credit

How Can You Check Your Withholding?

The IRS Tax Withholding Estimator, available at IRS.gov, is a free, step-by-step tool that helps you determine whether your current withholding is appropriate and recommends adjustments if needed.

It takes into account your:

• Filing status
• Income sources
• Deductions
• Credits

If your withholding needs to change, submit an updated Form W-4 to your employer as soon as possible.

Changes take effect starting with the next pay period. They do not apply retroactively.

When to Increase vs. Decrease Withholding

Generally, you should increase withholding if you:

• Hold multiple jobs simultaneously
• Have significant income not subject to withholding, such as freelance income, interest, dividends, or capital gains
• Owed taxes at the end of last year

You may want to decrease withholding if you:

• Qualify for significant deductions or tax credits beyond the standard deduction
• Consistently receive a very large refund — meaning you’re giving the IRS an interest-free loan throughout the year

123PayStubs and Accurate Withholding

For employers running their own payroll, calculating withholding accurately based on each employee’s current Form W-4 is a legal requirement.

123PayStubs automatically calculates federal and state income tax withholdings based on the filing status and elections on your employees’ W-4s, ensuring compliance and accuracy every pay period. Create your 123PayStubs account today and take the guesswork out of payroll.