Most employees in the U.S. take the pay-as-you-earn (PAYE) approach, in which estimated income tax is paid throughout the year and then accounted for on tax day of the following year. Employers withhold part of their employees' income for taxes by deducting a portion of their regular salary from their paychecks.
Employers rely on the information all new employees provide on Form W-4. When life changes occur, employees may choose to revise their W-4 withholding.
Key Takeaways
Taxpayers typically withhold income from their paychecks for federal income tax.
Your marital status has a material impact on the taxes that you owe.
As your family expands and more dependents are added, you may be eligible for additional deductions and tax credits.
You can change how much to withhold by submitting a revised Form W-4 to your employer.
Life Changing Events
Marriage: If you are married and filing a joint tax return, your taxes may be impacted in one of two ways. First, if your spouse earns an income, your household withholding may need to increase. Second, if your spouse doesn't work, your overall withholding will likely decline.
Divorce: Divorce can alter your household income, but there is also the matter of alimony. Alimony payments are not tax deductible for the payer and alimony recipients do not have to declare alimony as income.
Birth or Adoption: The birth or adoption of a child adds a dependent to your household and lessens the overall tax burden. To capitalize quickly on the credits and increased deduction, consider reducing withholding.
Major Expenses: When purchasing a home, you can update your withholding in anticipation of tax benefits. There are credits for first-time homebuyers, education credits, dependent care expenses, medical expenses, and charitable donations.
Non-Wage Income: You must adjust your withholding to account for any non-wage income from side businesses, stock dividends, or interest income. If you successfully invested and sold stock or cryptocurrency for a profit, the proceeds are subject to short-term or long-term capital gains, depending on your holding period.
Working Two Jobs: Two-income households and individuals who work multiple jobs are vulnerable to withholding disparities. For example, working two jobs where each pays $25,000 could push a taxpayer into a higher tax bracket. However, each withholding form may indicate that the taxpayer earns only $25,000 and falls within a lower tax bracket.
When your children grow up, consider readjusting your withholding as you may no longer be eligible to claim them as a dependent.
The IRS features a useful withholding calculator on its website. Form W-4 contains useful instructions that can help you estimate your withholding correctly. Here's how to adjust how much income is withheld for taxes and complete Form W-4, which is available on the IRS website:
2. Contact your employer to revise your federal income tax withholding.
3. If you have multiple jobs or you and your spouse work, complete Step 2 of Form W-4. The information from this step is used in the steps below.
4. If you have dependents, complete Step 3. This step determines what portion of your income is reduced due to the dependents you claim.
5. If you receive other income, such as interest, dividends, or retirement income, enter the amount in Step 4(a).
6. If you anticipate a deduction(s) other than the standard deduction, enter the amount you expect to claim in Step 4(b). You can use the Deductions Worksheet attached to Form W-4 to figure the amount.
7. If you expect that you'll need to pay more taxes, you can opt to withhold an extra amount by entering that figure in Step 4(c).
8. Upon submitting a revised form to your company, ensure that the appropriate changes have been made by comparing your previous and current pay statements. Changes to your withholding amount may be delayed by one or two pay cycles.
Is It Better to Withhold More or Less Taxes?
If you want to avoid paying taxes when you file your tax return, it is better to withhold more income throughout the year. However, there is a lost opportunity when withholding more than necessary. By overpaying taxes, you lose the chance to invest those funds and potentially grow your capital.
Will Changing Withholding Affect My Paycheck?
Yes, changing your tax withholding will change your take-home pay amount, though your gross pay will not change.
How Often Can I Revise My Withholding?
If your employer withholds taxes on your behalf, you can submit a revised Employee's Withholding Certificate (Form W-4) as needed.
The Bottom Line
When life changes occur, it may be necessary to resubmit a W-4 with an adjusted withholding amount. Paying too much tax throughout the year means a refund. However, if you pay too little, you may be surprised by a large tax bill.
To avoid a large or unexpected tax bill it is also a good idea to change your withholding when you experience a big life change such as marriage, divorce, birth of a child, getting a new or second job, starting a side business, or receiving any other income that isn't subject to withholding.
Any time your income goes up, your tax liability will likely go up too, requiring a new W-4. If your extra income comes from a side job with no tax withholding, you could submit a new W-4. It would adjust the withholdings at your main job for the extra income.
How to fill out your W-4 to get more money back as a refund (or reduce what you might owe): You could reduce the amounts on 4a (other income) or 4c, or increase the number on line 4b (deductions).
Higher Withholding: Select YES if you (1) hold more the one job at a time, or (2) are married filing jointly and your spouse also works. The correct amount of withholding depends on income earned from all of these jobs.
By placing a “0” on line 5, you are indicating that you want the most amount of tax taken out of your pay each pay period. If you wish to claim 1 for yourself instead, then less tax is taken out of your pay each pay period.
How you can change your W-4 to get a bigger tax refund. If you want to get more money back in your tax refund each year, you can designate that a larger amount of your paycheck is withheld. It's simple -- just enter the extra amount you want withheld from each paycheck on line 4(c) of your W-4 form.
Individuals should generally increase withholding if they hold more than one job at a time or have income from sources not subject to withholding. If they don't make any changes, they will likely owe additional tax and possibly penalties when filing their tax return.
To receive a bigger refund, adjust line 4(c) on Form W-4, called "Extra withholding," to increase the federal tax withholding for each paycheck you receive. Tax withholding calculators help you get a big picture view of your refund situation by asking detailed questions.
If you want less taxes taken out of your paychecks, perhaps leading to having to pay a tax bill when you file your annual return, here's how you might adjust your W-4. Increase the number of dependents. Reduce the number on line 4(a) or 4(c). Increase the number on line 4(b).
Single: W-4 Single status should be used if you are not married and have no dependents. Married: W-4 married status should be used if you are married and are filing jointly.
Generally, you want about 90% of your estimated income taxes withheld and sent to the government. 12 This ensures that you never fall behind on income taxes (something that can result in heavy penalties) and that you are not overtaxed throughout the year.
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.
You can claim anywhere between 0 and 3 allowances on the W4 IRS form, depending on what you're eligible for. Generally, the more allowances you claim, the less tax will be withheld from each paycheck. The fewer allowances claimed, the larger withholding amount, which may result in a refund.
Completing a new W-4 can get complicated, but it's important to get your withholding right. In fact, if you withhold too much during a tax year, you can end up with a large tax refund. If you withhold too little, you can create a balance due and potentially an underpayment penalty.
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