How to Adjust Tax Withholding From Your Paycheck

Accurately calculate your withholding for federal income taxes

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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. 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. The IRS provides interactive tools to help you along.

Key Takeaways

  • The IRS revamped the old Form W-4 to accommodate changes made by the Tax Cuts and Jobs Act (TCJA). This version simplifies the process of completing it a great deal, with plenty of instruction and guidance. 
  • The IRS provides a few tools online that you can use to get your withholding as correct as possible based on your income, expenses, and life circumstances. 
  • Receiving a tax refund due to having too much withheld just means the IRS is returning your money to you…without interest. But you don’t want to owe at tax time, either.
  • You can change your withholding at any time. You’re not limited to an annual deadline.


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. It's just returning it to you when you get a tax refund—without interest. It would have served you better in a simple savings account.

The Withholding Form

Calculating a level of tax withholding that's just right can sometimes take as much time as preparing your tax return. But the IRS introduced a new Form W-4 beginning with tax year 2020 that can simplify the process a bit. It aligns with changes made by the 2017 Tax Cuts and Jobs Act (TCJA). The TCJA eliminated the personal exemption, which was tied into the allowances you could claim on the old form.

The new form aims to simplify the process. It uses a question-and-answer format. It allows you to adjust your withholding upward or downward.

You can have more withheld from your paycheck to cover you at tax time if you expect significant investment income or if you have other outside income that's not subject to withholding. You'll get a refund if you have too much withheld. You'll owe the IRS at tax time and you could also incur a penalty if you adjust your withholding amount too far downward.

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 this year's tax rates and income brackets. Calculate your income and deductions based on the income you expect for this year. Use the current tax rates to determine your projected tax.

Then use the withholding calculator on the IRS website to see the suggested withholding for your personal situation. The number of dependents you support is an important component of your analysis, as is the number of streams of income.

Calculating the Effect on Your Paychecks

You can use the number to see what the tax impact will be on your next paycheck when you've figured out your withholding. Plug your newly calculated withholding information into a payroll calculator. Make sure you have a recent pay stub handy so that you can use your actual income amounts.

Calculating Your Total Withholding for the Year

Take your new withholding amount per pay period and multiply it by the number of pay periods remaining in the year. Next add in how much federal income tax has already been withheld year to date. This total represents approximately how much total federal tax will be withheld from your paycheck for the year.

Ask yourself whether 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 do that.

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, that's how much federal tax you might have to pay when you file your tax return.

Remember that your withholding and tax liability amounts 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.

Frequently Asked Questions (FAQs)

How do you change the tax withholding on SSI checks?

You can change your tax withholding on Social Security income, unemployment compensation, and other kinds of government benefits by submitting a new Form W-4V.

What is the average amount of taxes taken out of a paycheck?

The average tax wedge in the U.S. was about 34.6% for a single individual in 2020. The tax wedge isn't necessarily the average percentage taken out of someone's paycheck. Someone would have to pay just the right amount of taxes so that they wouldn't owe or get a refund when they file their tax return—in that case, the average rate of 34.6% would apply.