The federal income tax is a pay-as-you-go tax. Taxpayers pay the tax as they earn or receive income during the year. Taxpayers can avoid a surprise at tax time by periodically checking their withholding amount. The IRS urges employees and those who receive a pension or annuity to check their withholding every year. Here’s what to know about withholding and why checking it is important.
Understand tax withholding
An employer generally withholds income tax from their employee’s paycheck and pays it to the IRS on their behalf. At the end of the year, the employer sends the employee Form W-2, Wage and Tax Statement with the wages paid and any amounts withheld.
How withholding is determined
The amount withheld depends on:
- The amount of income earned and
- The information an employee gives to their employer on Form W–4, Employee’s Withholding Certificate. Publication 505 has details on completing the form.
Employees must specify a filing status on Form W–4 and may complete other parts of the form if they expect to have additional income, deductions beyond the standard deduction, or tax credits. They cannot specify only a dollar amount for their employer to withhold.
Employees should check withholding
The IRS recommends that employees check their withholding, especially for anyone whose refund is larger or smaller than expected. For those who owe, increasing tax withholding in the current year is the best way to avoid having to pay tax when filing a tax return the following year. In addition, taxpayers should always check their withholding when a major life event occurs or when their income changes.
When to check withholding:
- At the beginning of the year to ensure the withholding is correct for the tax year ahead.
- When changes in tax law affects a taxpayer’s situation.
- When the taxpayer has a lifestyle or financial change like marriage, divorce, birth or adoption of a child, home purchase, retirement, or filed chapter 11 bankruptcy.
- When there is a change in a taxpayer’s wage income, such as the taxpayer or their spouse starts or stops working or starts or stops a second job.
- If the taxpayer has taxable income not subject to withholding, such as interest, dividends, capital gains, self-employment and gig economy income, and IRA distributions.
- When a taxpayer is reviewing their planned deductions or eligible tax credits, including items like medical expenses, taxes, interest expense, gifts to charity, dependent care expenses, education credit, Child Tax Credit or Earned Income Tax Credit.
Here’s how taxpayers can check their withholding:
- Employees. Many employees can use the Tax Withholding Estimator tool on IRS.gov.This tool can help most employees determine whether they need to give their employer a new Form W-4. They can use their results from the estimator to help fill out the form and adjust their income tax withholding.
- People with a pension or annuity who aren’t employed. These taxpayers shouldn’t use the Tax Withholding Estimator tool. Instead, they should use Form W-4P, Withholding Certificate for Periodic Pension or Annuity PaymentsPDF to estimate their tax withholding for these payments.
- Taxpayers with a complex tax situation. Taxpayers with more complex situations may need to use Publication 505, Tax Withholding and Estimated Tax instead of the Tax Withholding Estimator tool. This includes employees who owe the alternative minimum tax or tax on unearned income from dependents. It can also help those who receive non-wage income such as dividends, capital gains, rents and royalties. The publication includes worksheets and examples to guide taxpayers through these special situations.
- Taxpayers with nonresident alien status. These taxpayers can use the special instructions in Notice 1392, Supplemental Form W-4 Instructions for Nonresident AliensPDF.
How to change withholding
To change their tax withholding, employees with wage income can use the results from the Tax Withholding Estimator to determine if they should complete a new Form W-4 and submit to their employer. Taxpayers shouldn’t send the form to the IRS.
Some employers use an automated system to submit Form W-4. Taxpayers should check with their employer on how to submit a new Form W-4.
- Pay as You Go, So You Won’t Owe
- Form W-4S, Request for Federal Income Tax Withholding from Sick Pay
- Form W-4V, Voluntary Withholding Request