Completing one more tax form is not something anyone looks forward to. But if you’re an employee and think you may receive a smaller tax refund than you had hoped for or that you may owe money to the IRS at year's end, you may want to complete a new W-4 form to change the tax that’s withheld from your paychecks.
Tax Withholding Tables
The 2017 Tax Cuts and Jobs Act (TCJA) put in place new tax rules and tax rates that took effect in 2018. The tax rates and tax brackets reflected in the new withholding tables leave more money in each paycheck than was the case before the TCJA. Keep in mind that these tables provide but an estimate of your year-end tax liability.
Withholding Tables Marriage Penalty
One basis of the withholding tables is the assumption that each taxpayer, married or not, is the sole wage earner. This assumption is reflected in the fact that when a married couple files a joint return, their incomes are combined. Based on a combined income amount, a tax rate may be higher than if each person adopted a single filing status and reported his or her own income.
To counter this issue to some degree, a unique W-4 form can be completed to account for each job you or your spouse may work and another for self-employment income.
Tax Withholding Estimator
The Internal Revenue Service (IRS) provides a Tax Withholding Estimator, which is an online tool you can use to calculate the tax that should be withheld from each paycheck to avoid owing taxes at year's end. You simply specify a certain withholding amount – a possible W-4 entry – and additional bits of information, and the tool estimates the tax liability.
Work with the tool until you identify the W-4 entry that will best achieve your objective – namely, not to owe tax at year's end. To do so, you’ll need data from a recent pay stub and a copy of your most recent tax return.
Need for Revised W-4
If it appears that, based on the Tax Estimator results, you’ll owe taxes, file a new form W-4 with your employer. This way, you'll increase the amount withheld from each remaining paycheck in the current tax year. The estimator will tell you the “extra withholding amount” that you should enter on Line 4 (c) of the W-4 form. When January rolls around, you can repeat the process and complete a new W-4 for the new year.
It's important to review your current W-4 because if you owe more than $1,000 after subtracting withholding and credit amounts, or you paid less than 90 percent of the tax due for the current year or less than 100 percent of the tax due for the prior year, the IRS may assess a penalty.
Using a W-4 Form
The W-4 form controls the amount of tax withheld from your paycheck. In addition to the "extra withholding amount," the form calls for a variety of information. For instance, you're asked to supply the number of children in your family who are less than 17 years of age as well as the number of your dependents that are older than 17. It’s important that this information is accurate because the tax credit dollar amount per individual varies with the dependent’s age.
Ask your employer for the W-4 form or visit the IRS website to download it. If you follow the form's instructions, you can make the right entries to avoid owing a large amount at tax time.
Extra Paycheck Withholding
To ensure you don't owe taxes, you may need to increase your tax withholding.
To update a form W-4 to account for your desired withholding amount, first use the Tax Estimator to determine the amount you think you’ll owe in taxes. Next, divide that amount by the number of paydays that remain in the year. Enter this "extra withholding" amount in step 4 line C of the W-4 form.
For instance, assume that you owe $5,000 and 30 paydays remain this year. The extra amount that should be withheld per paycheck equals $5,000 divided by 30, or $166.67.
This approach doesn’t guarantee that you won't owe the IRS cash, but the amount may be small. Also, it decreases the risk that you’ll pay an under-withholding penalty.
If you’re an employee and think you might receive a small tax refund or that you might actually owe money to the IRS, you can complete a new W-4 form to change the tax withheld from your remaining paychecks. Before you do so, use the IRS Tax Withholding Estimator to determine the W-4 entries you should make. That approach best ensures the right amount of tax is withheld from each paycheck.
- Internal Revenue Service: 2020 Form W-4 Employee's Withholding Certificate
- Tax Policy Center: Tax Cuts and Jobs Acts
- Internal Revenue Service: Tax Withholding for Individuals
- Internal Revenue Service: Tax Withholding Estimator
- Internal Revenue Service. "Tax Withholding Estimator." Accessed Oct. 23, 2019.
- Internal Revenue Service. "Tax Withholding and Estimated Tax For use in 2019," Page 10. Accessed Oct. 24, 2019.
- Internal Revenue Service. "Part III – Administrative, Procedural, and Miscellaneous: Relief from Addition to Tax for Underpayment of Estimated Income Tax by an Individual," Pages 1–2. Accessed Oct. 24, 2019.
- You can claim fewer allowances, which means more tax gets taken out of your pay. That helps cut the amount you might owe at tax time.
- You might want to claim the fewest allowances for the job with the highest pay because it will have the highest tax rate. This means more tax will be withheld overall, reducing the chance you will owe the IRS money at the end of the year.
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.