When your employer withholds federal income tax from your check, he sends the amount to the Internal Revenue Service, where it is held as a credit toward your tax bill at the end of the year. If you don’t have enough withheld, you’ll owe the extra money to the IRS when you file your return. It’s easier on your budget to have enough tax taken out periodically throughout the year so you don’t owe. There can be several reasons for not having enough taken out, but all can be remedied.
You may not have enough federal taxes taken from your paycheck if you claimed too many allowances on your W-4 or experienced changes in your home or financial situations. Tax laws also change, which can increase your tax liability beyond what your employer takes out.
Your employer calculates and withholds your federal income tax based on entries you make on your W-4 withholding allowance certificate, which you typically fill out when you start a job. If you claim too many withholding allowances on your W-4, you could have an insufficient amount withheld from your check. Decreasing the number of allowances you claim will increase the amount of federal tax withheld. The filing status you claim on your W-4 also affects the amount withheld from your check. Single filers pay a higher tax rate than married filers, but it is possible for dual-income households to have insufficient withholding. If you’re married and your spouse also works, you may not have enough combined tax withheld if each of you claim the same number of allowances and choose the “Married” filing status on Form W-4. Entries you make on your W-4 are used by your employer only to calculate the amount of tax to withhold from your pay. These entries are not necessarily associated with the filing status or exemptions you claim on your tax return.
Changes in Your Situation
If you experience certain changes in your financial or home situations, you might need to adjust your W-4 entries. Marriage and divorce affect your filing status, your total household income and the amount of tax needed to cover your bill at the end of the year. Also, if you claimed children or other dependents in prior years but are no longer eligible to claim them, you’ll need more tax withheld to cover your tax liability. Increases to your income could also place you in a higher tax bracket, making it necessary to have more tax withheld. If any of these scenarios occur, you’ll need to evaluate your W-4 entries and make changes if necessary.
Changes in Tax Law
One of the most common sources of withholding confusion stems from tax law changes. Each year, the IRS introduces new credits and deductions, and phases out or eliminates old credits and deductions. When this happens, you may experience changes in your tax refunds or amounts owed when you file your return. For example the Tax Cuts and Jobs Act of 2017 repealed the personal exemption for 2018 and future tax years; the exemption was valued at $4,050 for a taxpayer as well as the taxpayer’s spouse and dependents. Special credits and exemptions create a false sense of security for taxpayers, and folks can forget they may be temporary or be repealed.
IRS Withholding Calculator
If enough federal tax is not being withheld from your check, you can check your current W-4 allowances against appropriate allowances on the IRS website. The IRS provides a withholding calculator tool that generates results individualized for your situation. With this tool, you’ll enter information about your household income, number of dependents and filing status, and the IRS will apply your entries to current tax rates and laws. Your results will show you what you should claim on your W-4, and if you haven’t had enough withheld, the IRS will estimate how much you’ll owe at tax time so you can get caught up before you file.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.