If you experienced any life changes – got married, had children, took on a side hustle, etc. – since filing your most recent Form W-4, it may be time to check your withholding.
What is a Form W-4?
As an employee, one of the important forms you fill out on your first day of work is a Form W-4. This IRS document lets your employer know how much should be withheld from your paycheck for federal income taxes. The Form W-4 uses marital status, number of allowances and dependents, and other factors to determine the amount of taxes to withhold for an employee.
It is your responsibility to keep your W-4 updated so your employer withholds the correct amount of money throughout the year. If your information is not updated after a life event, like getting married or having a child, you could be paying too much or too little in taxes. In some cases, incorrect W-4 information can lead to a tax penalty from the IRS.
What is Withholding?
Withholding is the amount of income tax your employer reserves from your paycheck to pay the IRS in your name. Your employer is required to withhold federal income tax from your paycheck. Most employees are subject to tax withholding – with the exception of independent contractors, who are responsible for their own taxes.
The amount of withholding is determined by the amount of income earned and the information given on your Form W-4. By withholding a small amount of what you’ll owe for the year every paycheck, paying federal income tax tends to be less challenging. For most, paying out smaller portions of every paycheck is preferable to a large tax bill at the end of the year.
What Parts of My Income Have Withholding?
Employees are subject to withholding on the following kinds of income:
- Regular pay
- Vacation pay
- Gambling winnings
How and When Do I Check My Withholding?
You can check your withholding with the IRS Tax Withholding Estimator. Have your paystubs, information from other income, and most recent tax return ready so you can get an accurate estimation of what you should have withheld.
The IRS recommends checking your withholding:
- Early in the year
- When the tax law changes
- When you have life changes:
- Lifestyle – Marriage, divorce, birth or adoption of a child, home purchase, retirement, filing chapter 11 bankruptcy
- Wage income – You or your spouse start or stop working or start or stop a second job
- Taxable income not subject to withholding – Interest income, dividends, capital gains, self-employment income, IRA (including certain Roth IRA) distributions
- Adjustments to income – IRA deduction, student loan interest deduction, alimony expense
- Itemized deductions or tax credits – medical expenses, taxes, interest expense, gifts to charity, dependent care expenses, education credit, child tax credit, earned income credit
These changes can qualify you for a deduction in your taxable income, so it is essential to keep your information recent and correct.
How Can I Update My Withholding?
If you wish to update your withholding, you’ll need to submit a new W-4 to your employer, which can be done on paper or electronically. Talk to your employer about how best to submit your Form W-4. Your W-4 can be adjusted at any time during the year, but the later in the year you make changes, the less impact it will have on your taxes for that year.