Get Your Tax Withholding and Allowances Just Right on Form W-4
What to Do If Your Withholding on Form W-4 Is Wrong
Completing Form W-4 provides your employer with the information it needs to calculate how much Social Security, Medicare, and income taxes it should withhold from each of your paychecks and send to the IRS on your behalf. The goal is to get your W-4 withholding allowances just right so your employer holds back the exact amount you’ll owe in taxes at the end of the year.
Yes, it's easier said than done, but it is doable. A worksheet attached to the W-4 form can help you along, and the IRS offers an interactive W-4 allowance calculator on its website as well. The calculator automatically makes adjustments if it appears that you might be eligible for any tax credits that will affect your end-of-year tax liability, and it accommodates more than one income if you’re married and planning to file a joint return.
Income Tax Withholding
Your employer will apply the information you’ve entered on your W-4 to the Income Tax Withholding Table published by the Internal Revenue Service to determine what percentage of your pay must go to income taxes.
Several factors influence the amount of income tax withheld, including your filing status and how many dependents you have. Your employer will withhold more to cover your income tax bill if you’re single with no dependents than if you’re married or single but with one or more dependents. More withheld means a smaller paycheck. The balance of your earnings goes to the IRS to hold on to until tax time.
Determining Your Allowances
You and your dependents each represent an “allowance” on your W-4. The more allowances you have, the less tax you pay and the more money you'll see in your paycheck to cover your monthly expenses. Allowances are worth $4,200 in 2019, up from $4,150 in 2018, but the exact amount can depend on various factors. This is a "base" amount—all other calculations start from here.
Normally, you would enter two allowances on your W-4 if you’re single with no dependents and have only one source of income. This means one allowance for yourself, and one allowance because you’re single and working just one job.
It gets more complicated if you work multiple jobs, if you’re married and your spouse works, or if you’re single but have dependents—single taxpayers with one or more dependents might qualify for the advantageous head of household filing status. Another wrinkle comes up if you only work for part of the year. You might want to use the W-4 instructions or the IRS calculator in these situations.
You're generally pretty close to correct if you claim two allowances if you're married—one each for you and your spouse—plus one for each of your dependents, if any.
You Know You Got It Wrong If…
Did you owe the IRS money last year when you completed your tax return? This is a clue that you didn’t get your withholding allowances right when you completed your W-4, particularly if your deficit was significant. You went a little heavy on your allowances, resulting in more take-home pay.
If your refund jumps considerably from 2018 to the 2019 tax year, this is a red flag, too. This likely means that you had too much withheld from your pay. You gave the IRS more money than you had to.
If You Underpaid
Not only will you have to come up with money for the IRS long after you earned it, but the IRS might impose an underpayment penalty on top of what you were short. The penalty kicks in if you paid in less than 90% of what you owe or less than what you paid last year, whichever is less.
You’ll dodge the penalty bullet if the total of what you owe is less than $1,000 after calculating in what you paid through withholding and any refundable credits you’re entitled to.
If You Overpaid
Unless you qualified for a refundable tax credit or two and that represents part of your refund, this is just your own money being returned to you interest-free after the close of the tax year. It didn’t grow for you as it would have if you had given the IRS just the right amount over the course of the year and placed the excess in a savings account or investment instead.
If you complete your tax return by April and realize you owe money, and if nothing in your life has changed that would require completing a new W-4, divide how much you ended up owing by the number of pay periods remaining in the year
Let’s say you owe $3,000 and you’re paid weekly. There are 36 weeks left in the tax year. Based on your current W-4—which assumes your pay stays the same as last year—you’ll be running at about an $83 deficit for tax withholdings on each paycheck during that time period. You can ask your employer to withhold an additional $83 from each of your paychecks going forward through the remainder of the year so you shouldn’t owe money again come next April.
This option should only be used as a Band-Aid if your extra take-home pay is due to a pay increase. It’s a quick fix, a temporary remedy until you get your W-4 completed correctly based on your new income, and you’ll want to do this as soon as possible.
You can take the same precaution if you suddenly come into extra money. Ask your employer to withhold a little extra to accommodate that additional income. Otherwise, if you have the available cash, you can make estimated tax payment to the IRS using Form 1040-ES and leave your employer out of it.
You can ask for additional withholding by entering the amount on line 6 of your W-4.
Should You Ever Claim Fewer Allowances?
You don’t have to claim allowances if you don’t want to. For example, you might do a little freelance work on the side apart from your regular job for which you’ll receive a 1099-MISC form at the end of the year. Taxes aren't withheld from this type of income.
The IRS prefers to be paid when you get paid so you can either send in quarterly estimated tax payments to cover this 1099 income, or you can claim zero allowances on your W-4 form so more money than necessary comes out of your paychecks from your primary job. That money will go to the IRS to cover the taxes owed on your 1099 income just as if you had sent in estimated payments.
FICA Tax Withholding
Your employer will also withhold additional money to cover your FICA taxes. FICA stands for the "Federal Insurance Contributions Act" and it covers Social Security and Medicare taxes, both of which are essentially insurance funds for the benefit of the disabled and elderly.
These taxes are obligatory. You don’t have the option of not paying them, and the amount of your future Social Security benefits depends on them.
The Social Security tax amounts to 6.2% of your gross income up to $132,900 as of 2019. Income over this threshold isn't subject to the Social Security tax—for that tax year, anyway. Withholding for Social Security begins again the following January.
Medicare is 1.45%, although you might also be subject to the Additional Medicare Tax if your income exceeds certain limits: $200,000 if you're single or file as head of household, $250,000 if you're married filing jointly, and $125,000 if you're married but file a separate return.
These percentages are withheld from your paychecks and your employer must contribute equal amounts. You don’t have any wiggle room to adjust the amounts because they're fixed rates.
Be Alert With Social Security Withholdings
It’s possible to pay too much in Social Security tax, so this withholding is something you’ll want to keep an eye on as the year progresses if you earn more than $132,900, called the "wage base limit." The limit tends to increase annually because it's adjusted for inflation.
Touch base with your employer to make sure the company realizes that you no longer have to contribute to Social Security until the next tax year when and if your earnings hit this earnings level. This is particularly the case if you work more than one job and have one or more employers withholding Social Security tax from your pay.
Are You Exempt From Withholding?
A few individuals are exempt from tax withholding and Form W-4 provides a box that these taxpayers can use to indicate so. Just write "exempt" in box 7 and complete boxes 1, 2, 3, and 4 if you qualify.
You're generally exempt if you had absolutely no tax liability last year and you expect to have none this year. This means you received a refund for every dime that was withheld from your pay last year and circumstances haven't changed so the situation will likely repeat itself this year.
Check with a tax professional first before claiming that you're exempt to make absolutely sure you meet these qualifications.
You'll have to redo your W-4 each year to indicate that you qualify as exempt for that particular tax year. For example, the 2019 exemption lapses or expires as of February 17, 2020.
That’s It, You’re Done...Or Are You?
Completing Form W-4 isn’t a one-time event. Life isn’t stagnant and certain changes can make the form out-of-date in a flash, resulting in withholdings that are too much or too little. Use the IRS interactive calculator to rework your withholding allowances if you get married, get divorced, or have a child.
You might also want to recalculate if you get a raise, buy a home, or make any new investments, because all these events can affect your tax situation.
Ask your employer for a new W-4 and complete it to reflect the new information. You can complete a new W-4 anytime you'd like and give it to your employer. It doesn’t have to be filed with the IRS. Any changes should show up in your take-home pay pretty much immediately.
You can also adjust your W-4 at any time simply because you got it wrong last year. You don’t have to wait for a new tax year to roll around. Make adjustments as soon as possible.
The Effect of the New Tax Law—It Might Be Your W-4
You don't necessarily have to worry if you noticed a difference in your take-home pay in 2018, or even if you received a little extra refund, even if you didn't make any changes to your W-4. The IRS issued new withholding guidelines to employers in February 2018 to reflect the changes made by the Tax Cuts and Jobs Act (TCJA) that went into effect in January.
The new tax law changed the tax brackets and the standard deductions for each filing status, and this was probably reflected in your paychecks or refund. You might want to review your allowances, however, just to make sure you're still covered without over-withholding and using the IRS as an interest-free savings account.