Taxpayers are expected either to have federal tax withheld from their paychecks or make estimated tax payments to the Internal Revenue Service. If you underpay your taxes, the IRS may assess you a penalty or contact your employer. To avoid having too little tax withheld from your pay, you may need to adjust your withholding or make supplemental payments to the IRS.
The first and best way to avoid having too little tax withheld from your pay is to adjust your withholding. Form W-4 is the form used to designate the amount of federal income tax your employer should withhold from your pay. To adjust your withholding, complete a new W-4, change the number of allowances and provide your employer with the revised W-4. Increasing your allowances lowers your tax liability, while decreasing your allowances increases your tax liability, meaning more tax will be withheld. Use the worksheet that accompanies the W-4 to help you determine the correct number of allowances. You can find a W-4 with instructions online (see Resources).
On your W-4, list the number exemptions for which you are actually responsible, no more. For example, if you and your spouse have two kids, list no more than four exemptions on your W-4. Listing more could lead to you having too little tax withheld. If you want to be on the safe side, list fewer exemptions on your W-4 than you actually have. If you want to avoid a penalty, it's better to receive a refund at the end of the year than to owe money.
Your withholding is calculated based on your income and the exemptions claimed on the W-4 you submitted to your employer. A good way to measure whether you are having enough tax withheld from your paycheck is to use the IRS withholding calculator online (see Resources). The withholding calculator will prompt you to answer a series of questions about your income, exemptions, credits and filing status. It will then use your answers to calculate the amount you should have withheld from your paycheck.
If you suspect that you are having too little tax withheld but, for whatever reason, cannot adjust your withholding, mail estimated tax payments to the Internal Revenue Service. Be sure to keep a record of payments and mail dates.
Unless your tax situation has changed, review your last year’s tax return. If you are happy with the refund you received (or the amount of tax owed) based on last year’s return, make certain that the federal withholding on your pay stub is in line with the federal withholding listed on last year’s return.