How to Adjust Tax Withholding From Your Paycheck
Accurately calculate your withholding for federal income taxes
Dealing with your taxes is as much a matter of planning for next year as it is finishing and filing your tax return this year. Life isn't stagnant, and your income or deductions can change. But you can always adjust your withholding to avoid receiving too large of a refund or, even worse, owing a significant balance to the Internal Revenue Service (IRS) come tax time.
Finding just the right level of withholding can be a balancing act—particularly if you anticipate big changes in the coming year—or personal events with tax implications, like getting married, divorced, or having a child. Some general rules of thumb and an understanding of the process can help, and the IRS provides some interactive tools to help you along.
Why Would a Refund Be a Bad Thing?
Receiving a tax refund actually means you gave the IRS more from your paycheck than you had to—money that you could otherwise have spent on bills, pleasure, retirement savings, or investments.
The IRS held onto that extra money for you all year and is now returning it to you when you get a tax refund—without interest. It would have done you better in a simple savings account.
New Withholding Form for 2020
Calculating a level of withholding that's "just right" can sometimes take as much time as preparing your tax return.
The IRS introduced a new Form W-4 that covers tax year 2020 moving forward. It aligns with changes made by the 2017 Tax Cuts and Jobs Act that eliminated the personal exemption, which tied into allowances. The new form aims to simplify the process and uses a question-and-answer format. It allows you to adjust withholdings upward or downward.
If you expect significant investment income or have other outside income not subject to withholding, you can have more withheld from your paycheck to cover it at tax time. If you overwithhold, you'll get a refund. Alternatively, if you adjust your withholding amount too far downward, you will owe the IRS at tax time and could also incur a penalty.
Paying at least 90% of your tax owed is usually enough to escape the estimated tax penalty.
Calculating Withholding More Accurately
One way to adjust your withholding is to prepare a projected tax return for the year. Use the same tax forms you used the previous year, but substitute the current tax rates and income brackets. Calculate your income and deductions based on what you expect for this year and use the current tax rates to find out what your projected tax will be.
Now use the withholding calculator on the IRS website to see what the suggested withholding is for your personal situation.
The number of dependents you support is an important component of your analysis, as is how many streams of income come into your household, say because you and your spouse both work.
Calculating the Effect on Your Paychecks
Once you've figured out your withholding, you can use this number to see what the tax impact will be on your next paycheck.
Plug your newly calculated withholding information into a payroll calculator. Make sure you have a recent pay stub handy so you can use your actual income amounts.
Calculating Your Total Withholding for the Year
Take your new withholding amount per pay period and multiply this by the number of pay periods remaining in the year. Add in how much federal income tax has already been withheld year-to-date. The total represents approximately how much total federal tax will be withheld from your paycheck for the year.
Ask yourself if you can easily write a check to the government plus a little interest if your calculations show that you're going to owe the IRS $500 in April. Now is the time to adjust if you can't.
You can now compare your total withholding to your tax liability projection. If your withholding amount is larger than your tax liability, that's how much of a federal tax refund you can expect to receive. If your withholding is less than your tax liability, this is how much federal tax you might have to pay when you file your tax return.
Remember, these amounts—your withholding and your tax liability—are approximate. You're close to where you need to be if they're not too far apart. You're free to change your withholding at any time during the tax year if a change in your circumstances would result in a tax increase or decrease.
IRS. "Tax Withholding." Accessed April 23, 2020.
H&R Block. "8 Marriage Tax Changes You'll See After Tying the Knot." Accessed April 23, 2020.
IRS. "W-4 Employee's Withholding Certificate 2020." Accessed April 23, 2020.
IRS. "Pay As You Go, So You Won’t Owe: A Guide to Withholding, Estimated Taxes, and Ways to Avoid the Estimated Tax Penalty." Accessed April 23, 2020.