The U.S. has a pay-as-you-go tax system. This means that instead of paying your total tax bill in one lump sum, the amount of tax you owe is spread out over the entire year.
When you start a new job, you fill out a Form W-4 that tells your employer how much of your income should go to your tax liability. As a result, a certain amount of federal income tax is withheld from your paycheck each pay period.
If you are having too much income withheld for taxes, you will get a refund when you file your next return.
But if you have too little withheld, you will owe the IRS at tax time – and you might even have to pay a penalty for it.
Fortunately, it is easy to update your withholdings and avoid a surprise when you file your next return.
When should I check my withholdings?
Anytime your personal or financial situation changes, you’ll want to make sure you are having enough income tax withheld from your paycheck. Here are five reasons you would need to give your W-4 an update.
Your total household income increased
A change in total income might put you in a different tax bracket, and you could end up owing more in taxes than you expected.
You started a side-gig
If you work two jobs, you can split your allowances between two W-4s, or you can claim all of them on a single form. Income tax withholdings are calculated based on your total earnings, so if you don’t receive a Form W-2 from your side gig (say you get a 1099 instead), you still need to account for your additional income on your W-4.
You or your spouse began a new job
If you and your spouse file a joint return and you’re both employed, you really only need to fill out one W-4 with your combined allowances. Otherwise, you can divide them over both W-4s. Just be sure you aren’t claiming the same allowances on two different forms.
Your family situation changed
The number of allowances you can claim changes when you have children, get married or get divorced. If you didn’t make an adjustment after a major life event, do it as soon as possible. Waiting means there are fewer pay periods to withhold the necessary federal tax.
The tax laws changed
The tax laws in America are subject to change, and some tax laws will even change every year.
If there is a major tax law update (the last time this happened was in 2018 with the Tax Cuts and Jobs Act), it could impact how much you owe for taxes and/or how much you get back in your refund. If your tax liability goes up due to the tax law changes, you could avoid a surprise tax bill by adjusting your withholdings ahead of the filing season.
How can I adjust my withholdings?
Adjusting your withholdings for these life events is simple:
- Estimate how much income tax should be withheld from your paycheck each pay period using the IRS Withholding Calculator.
- Complete Form W-4. The W-4 can be adjusted anytime during the year. You can simply ask your employer for a new form or download one here. Use the following steps to fill out the form:
- Step 1 – Enter your personal information
- Step 2 – Enter multiple jobs or indicate that your spouse also works
- Step 3 – Claim dependents
- Step 4 – Indicate other adjustments (optional)
- Step 5 – Sign the form
- If you haven’t been withholding enough for income tax, you can make an estimated payment. To do so electronically, use IRS Direct Pay or the Treasury Department’s Electronic Federal Tax Payment System (EFTPS).
This article is up to date and accounts for tax law changes for tax year 2021 (tax returns filed in 2022).