How to Change Your Tax Withholdings
How do I change how much $$ comes out of my paychecks?
Consider changing your paycheck tax withholdings if you find yourself getting a big refund or getting a big tax bill. Changing your paycheck tax withholdings isn't hard. The change can add hundreds of dollars to your paycheck or reduce your tax bill.
TIPS TO CHANGE YOUR PAYCHECK TAX WITHHOLDINGS:
Use our step-by-step guide to learn the process of changing your paycheck tax withholdings
Review the reasons why you may what to change your paycheck tax withholdings
Check out the often-asked questions about paycheck tax withholdings
Please note: The information provided is general guidance and not meant as advice. It’s advisable to consult with a tax professional before making tax decisions.
FOLLOW THIS STEP-BY-STEP GUIDE TO CHANGE YOUR PAYCHECK TAX WITHHOLDINGS
First, contact your human resources or payroll department for instructions on how to change your paycheck tax withholding
Some employers may allow you to complete an online withholdings form. Other employers may require you to complete an IRS W4 Employee Withholdings Certificate.
The IRS W4 Employee Withholdings Certificate is the form employees use to let their employer know how much taxes to take out of their paychecks. Most people complete this form when they start a new job.
Second, print the IRS Form W4 and/or pull up your employer's online form
The W4 form has instructions and worksheets that may be helpful to use, even if you have an online form.
Third, gather the information below to help you complete the form:
Your most recent pay stub
Your spouse’s most recent pay stub
Other income information-invoices, 1099s, etc.
Most recent income tax return
Fourth, complete the form to change your paycheck tax withholdings
There are only 5 sections of the updated W4 form. Use the IRS Withholdings Estimator for the most accurate withholdings calculations. You can also use the W4 worksheets to calculate withholdings. Below are instructions for the 5 sections:
1: This is where you enter your personal information
2-4: You only complete the section that applies to you.
2: Use the IRS estimator or W4 Worksheet to complete if you have multiple jobs or a working spouse.
3: Complete if you have dependents. The math in this section is pretty simple.
4: Use this section to add income and adjust deductions and/or withholdings. The IRS Estimator can calculate this section for you.
5: Either sign and return the form to your employer or complete the online form.
The IRS Withholdings Estimator's goal is for you to not owe taxes nor get a refund. Clearview Tax gives an excellent video tutorial on how to adjust your W4 for different desired tax outcomes.
Nerdwallet has an excellent blog that walks you through how to complete the W4 if you get stuck. If you are a visual person, Katie St. Ores has a Youtube tutorial on completely the W4. The tutorial is for 2020, but there isn't a change to the form format, so it's still helpful.
REASONS WHY YOU MAY WANT TO CONSIDER CHANGING YOUR PAYCHECK WITHHOLDINGS
You were unemployed
Review your withholdings if you were unemployed and are now working during the current tax year. This is because you may be paying too much in taxes since you had a drop in income due to unemployment.
Your spouse’s new job increased or decreased your household income
An increase or a decrease in your family’s income may change how much or how little you owe the IRS. Use the IRS Withholdings Estimate to adjust withholdings, if needed.
You get a second job.
A second job is a great way to supercharge financial goals like paying off debt or a bucket list vacation. But the second job also increases your income, potentially increasing how much taxes you may owe to the IRS.
If your second job doesn’t withhold taxes, consider adjusting your main job’s tax withholdings to account for your increased income.
You have added or reduced the children in your household
Children legally considered dependents by birth or adoption may increase your tax deductions and tax credits, possibly lowering how much you owe in taxes. In most instances, you may be able to claim children you've fostered for 6 months or longer. Children no longer considered your dependents may decrease your tax deductions and tax credits, perhaps increasing how much you owe in taxes.
A change in marital status
Any change of marital status- marriage, separation, divorce, or death- impacts your tax filing status. The change will likely impact how much taxes you may owe.
You either got a big refund or a hefty bill from the IRS
This one is a little tricky. If you get a big refund, the rule of thumb is to adjust your withholdings.
I have a different opinion. If the only way you will save (be honest with yourself) is to get a lump sum once a year, consider keeping your current W4 withholdings.
On the other hand, if you know you will be responsible for the extra money, then adjust your withholdings.
If you have to write a check to the IRS, ask your tax professional to review your withholdings for the amount to adjust to so you owe fewer taxes.
Major Tax Law Changes
A good rule of thumb is to assume if you hear or read about tax laws changes, it applies to you and reviews your W4 withholdings.
Websites like the Tax Foundation have a wealth of information in a simple format to keep you up-to-date on any tax changes.
Any changes that may impact how much taxes you owe
Home purchase
Pay off student loans
Dramatic increase or decrease in income
A FEW OTHER OFTEN ASKED QUESTIONS
So what is the difference between a W4 vs W2?
A W4 is an IRS form you complete and give your employer to adjust how much taxes the IRS withholds from your paycheck. A W2 is a form your employer sends you by Jan 31 every year. The W2 summarizes the total income and how much taxes you paid. You use the W2 to file your taxes.
What about state taxes?
If you live in an area that collects taxes, you may be required to complete a state version of the W4. Some states may call their forms W4, but it’s different from the IRS W4.
IN CONCLUSION
Your W4 is a tool you can use to help you manage how much money the IRS takes out of your check. Make it an annual habit to check your withholdings. Better yet, if you work with a tax professional, ask them to review your W4 when filing your taxes. A simple review can save your potential hundred or thousands in money added to your check or from having to write a large check to the IRS.
ADDITIONAL RESOURCES
Tax Foundation information on the latest tax law changes
Tips to help you get organize or tax season
