The IRS requires employers to withhold an estimated tax payment from each employee’s pay check. You, not your employer, are responsible for making sure enough is withheld. You could be subject to an IRS penalty if you don’t have enough withheld throughout the year. It’s no surprise that many people find themselves wanting to ask the IRS “Am I paying enough taxes?”
The best way to make sure that enough taxes are being withheld from your pay check is to used the IRS W-4 calculator or spreadsheet to determine your federal withholding allowances.
Claiming Federal Allowances for Withholding
The IRS requires employers to have all regular employees fill out Form W-4, Employee’s Withholding Allowance Certificate. This form is used to determine an individual employee’s withholding amount, based on the number of federal allowances the employee claims. If you don’t claim the correct number of allowances, you could end up either owing taxes or receiving a large refund, which means the IRS was holding your money when it could have been in your bank account.
To help taxpayers determine the optimal number of allowances, the IRS provides a worksheet and an online Withholding Calculator. Both tools can help you determine the number of allowances to claim for special situations like tax credits and income from investments. They are the best defense against not having enough withheld for federal taxes. Whenever your employment situation or income changes, you should use the W-4 calculator or spreadsheet to make sure your allowance number is correct. You can submit a new W-4 to your employer whenever changes are needed.
Exemption from Withholding
You may claim yourself exempt from withholding on your W-4 form if you don’t expect to have any tax liability in the current year and will receive a refund of any money that was withheld. Also, you must have had no tax liability in the previous year. If you are exempt from withholding, your employer will not take any money from your paycheck for taxes. It’s important to only claim yourself exempt if you really qualify, since you could be subject penalties for failure to pay your taxes on time if you end up owing at the end of the year. If you do qualify, you are required to submit a new W-4 each year to qualify for this exemption.
2018 Tax Law
New tax laws for 2018 include changes to personal and dependent exemptions. In response, the IRS has updated the income tax withholding tables used by the W-4 withholding tools. Many taxpayers are expected to see changes in their tax situation, so the IRS recommends that all employees recalculate their allowances as soon as possible and submit a new W-4 with their employer if changes are needed. This will help ensure that the correct amount was withheld when you file your 2018 tax return in 2019.
- IRS: About Publication 15, Circular E, Employer's Tax Guide
- IRS: Form W-4, Employee's Withholding Allowance Certificate
- IRS: Estimated Taxes
- IRS: Withholding Calculator
- efile.com: How to Balance Your Paycheck Tax Withholding in 2018
- Internal Revenue Service. "Topic No. 753 Form W-4 – Employee's Withholding Certificate." Accessed Sept. 22, 2020.
Catie Watson spent three decades in the corporate world before becoming a freelance writer. She has an English degree from UC Berkeley and specializes in topics related to personal finance, careers and business.