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Am I Having Enough Withheld?

With every paycheck, your employer withholds some of your earnings for taxes. If too much is withheld, you will receive a refund, but the bad news is that you have kept that money out of your pocket and essentially provided the IRS with an interest-free loan during the year. On the other hand, if you owe taxes when you file your return, you may have to scramble to pay what’s due, and you could also owe interest and penalties to the IRS.

Your objective should be to have just enough taxes withheld to prevent you from incurring penalties when your tax return is due. You may owe some money at the time you file your return, but it shouldn't be much. Two ways to do this are by properly completing Form W-4 (and accompanying worksheets) when you begin a job, and providing an updated Form W-4 to your employer if your circumstances change significantly.

Use Form W-4 to choose the proper withholding amount

Two factors determine how much income tax your employer withholds from your regular pay: how much you earn and the information you provide on Form W-4. This form asks you for three pieces of information:

  • How many withholding allowances do you want to claim? You can claim an allowance for yourself, your spouse, each of your dependents. You can also claim an allowance for other reasons, such as whether you are a head of household or are planning to claim certain credits on your tax return. You can claim up to the maximum number you're entitled to, claim fewer than you're entitled to, or claim zero. You would make this decision based on your tax situation. You’ll see more on allowances below.
  • Do you want taxes to be withheld at the single or married rate? The married rate, which is associated with a lower withholding rate, should generally be used only by taxpayers who are married and file a joint return. Other people (including those who are married and file separately) should generally have taxes withheld at the higher, single rate.
  • Is there an additional amount you want withheld from your paycheck? This is optional. You might choose it if, for instance, you earn freelance or other income and would like to increase your withholding to cover that income (although you should also consider paying quarterly estimated taxes in this case).

Complete the worksheets to claim the correct number of allowances

The more allowances you claim, the lower the amount of taxes that are taken from your paycheck—and the more money you take home on payday. If you claim zero allowances, you will have the maximum amount withheld, which should help ensure that the taxes you pay will cover your tax liability. There will be a little less in your paycheck, and a little more applied to your tax liability, for every allowance you take. The correct number of allowances for you may depend on:

  • The number of personal and dependency exemptions that you claim on your federal income tax return.
  • The number of jobs that you work. If you are having taxes withheld at two jobs, you may have to determine how to spread out your allowances so your pay the correct amount of tax
  • The deductions, credits and adjustments to income that you expect to take during the year
  • Your filing status.
  • Consider whether your spouse works. When both spouses work and have taxes withheld at the married rate, they may have insufficient taxes withheld. In this case, you can switch your withholding to the single rate. Form W-4 includes a two earner/two job worksheet to help you decide how much to have withheld.

Other helpful Form W-4 worksheets include a personal allowances worksheet and a deductions and adjustments worksheet. IRS Publication 505 (Tax Withholding and Estimated Tax) explains these worksheets.

Update your withholding as needed

To avoid surprises at tax time, it's a good idea to periodically check your withholding. In some circumstances, you may have to make a change to ensure that the right amount of taxes is withheld. This includes:

  • When you're married and either of you starts or stops working
  • When you or your spouse are working more than one job
  • When you have significant nonwage income, such as interest, dividends, unemployment compensation, or self-employment income, or the amount of your nonwage income changes
  • When you'll owe other taxes on your return, such as self-employment tax or household employment tax
  • When you have a life change (such as a marriage, divorce, birth or adoption of a child, new home, retirement) that affects the tax deductions or credits you may claim
  • When there are tax law changes that affect your tax liability

If you find that you need to make changes to your withholding, you can do so at any time simply by submitting a new Form W-4 to your employer. To check on your withholding amount and to see whether you need to make changes to your W-4, the IRS has a comprehensive Withholding Calculator on their website. You'll need your most recent paystub as well as last year's tax return. You won't need to enter any personally identifiable information that ties the numbers you enter to you, but the more accurate the numbers you use, the more effective the calculator will be. Check it out here.