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Income tax withholding sets aside a portion of your regular salary or wages every pay period for taxes. It isn't set in stone, however. You can ask to have more or less of your salary withheld for taxes based on your tax filing status, deductions, additional income and more.
While you can adjust your tax withholding at any time, you might consider it when certain major life changes occur—marriage, a side business, a new home, a baby or an unusually large expense such as major medical costs. Here's a quick rundown on how withholding works and how to make adjustments if now's the time to do so.
How Tax Withholding Works
Withholding is how many employees pay their federal income taxes. If you're employed, your employer can take a portion of your paycheck and send it to the IRS on your behalf to cover your tax obligations.
When you file your tax return, you'll calculate how much tax you owe for the year—and how your tax bill compares to what you already paid in withholding. If the withheld amount is more than you owe, you'll get a refund. If you withheld too little, however, you'll owe the government.
The amount that's withheld from your pay depends on your income and the information you provide on Form W-4. You can adjust your withholding at any time by submitting a new W-4 to your employer.
Changing your withholding doesn't change the amount of tax you owe. It only changes the amount of money that's withheld from your paychecks to cover your taxes. The main impact of adjusting your withholding is to increase or decrease your refund—or cause a tax bill if you've withheld too little throughout the year.
When to Adjust Your Tax Withholding
Consider adjusting your withholding when you think you're taking too much or too little out of your pay to cover your taxes. Owing money at tax time—or receiving an extra large refund—could be a sign that your withholding is off. You may also want to re-evaluate your withholding if there's a major change in the tax code or if you've undergone a change in your filing status, potential deductions or eligibility for tax credits. Here's a short list of life events that could justify a fresh look at your withholding:
- Marriage
- Divorce
- Birth or adoption of a child
- A child reaches the age of 17
- Home purchase
- Retirement
- Filing chapter 11 bankruptcy
- You or your spouse stop working
- You or your spouse get a second (or any additional) job
- You or your spouse start a side business or do gig work
- You have investment income
- You are newly eligible for deductions such as student loan interest or alimony
- You are newly eligible for tax credits such as the child tax credit or earned income tax credit
- You have changed your pretax retirement contribution to a 401(k), traditional IRA or other qualifying retirement account
If you did not earn enough to owe taxes last year and won't have to pay again this year, you can write "exempt" under line 4(c) on your W-4 form to stop your employer from deducting federal income taxes from your paycheck. If you are exempt, you'll need to re-submit a new W-4 at the beginning of every year, since the IRS only recognizes this status in the calendar year it's requested.
How to Adjust Your Tax Withholding
You can adjust your tax withholding by submitting a new W-4 to your employer. Before you do, follow these steps to make sure you're adjusting properly:
1. Use the IRS Tax Withholding Estimator
Have your pay stub and your most recent tax return on hand for reference. The IRS Tax Withholding Estimator is an online interactive tool that shows you how your income, deductions, tax credits and filing status affect your withholding and take-home pay. After you enter your information, the estimator lets you know whether you're on track for a tax refund or a tax bill based on your current information. You'll also see how adjusting your withholding will affect your tax bill at the end of the tax year.
2. Update your information
Download a new Form W-4. Your W-4 should always be accurate and up to date, including your name and address. Updating any of the following information may change your withholding:
- Change your filing status: Submit a new W-4 if your tax filing status has changed—for instance, if you got married or had a baby and became head of household. A new filing status may affect the amount of tax that's withheld from your paycheck: See the tax tables on form W-4 for more detail.
- Add dependents: You can reduce the amount of taxable income used to calculate your withholding by claiming dependents on your W-4. In Step 3, deduct $2,000 for each child under 17 and $500 for every dependent child over 17. Your income must be less than $200,000 for single filers or $400,000 for joint filers.
- Withhold more so you don't come up short: Use line 4(a) to withhold additional money for income from an outside source that isn't subject to withholding, such as a side gig or investment income for you or your spouse. Line 4(c) is for any additional money you'd like to withhold. Use this line if the IRS Withholding Estimator showed that your current withholding won't cover your tax bill, or if you owed significant money the last time you filed taxes.
- Withhold less by claiming deductions: Line 4(b) is for additional deductions. The IRS Withholding Estimator or the deduction worksheet on your W-4 can help you figure out which deductions you might claim, how much these deductions might be and by how much you can safely reduce your withholding.
3.Submit your W-4
Your completed W-4 goes to your employer, not the IRS.
Finding the Right Balance
How much is the right amount to withhold from your paycheck? Conventional wisdom says just enough to cover your taxes—and nothing more. Using the IRS as an automatic savings plan isn't the most efficient way to save money. Adjusting your withholding isn't the simplest way to access additional cash, either.
Reviewing your withholding once a year or any time you've undergone a major life change is one way to strike a balance. You can update information and make adjustments as needed without creating too many ups and downs in your progress toward paying your taxes.
While you're taking stock of your finances, you might also want to check in on your credit. You can get a free copy of your credit report and view your credit scores for free with Experian.