Adjusting Income Tax Withholding on Paycheck

By | January 26, 2014

How to Adjust Withholding on W-4?

Employers will typically withhold a certain amount from each paycheck that is based on estimated of tax that someone will owe at year end. This wage withholding on a W-4 is an easy way for the IRS to collect taxers but is not always the best for the taxpayers. This is why an employee should adjust their W-4 withholding to their own wage situation. An employee can adjust their W-4 to reflect life changes as often or as little as they would like.


Receiving a Large Tax Refund?

If you typically receive a large refund from IRS after you file your income tax return, or you owe the IRS a substantial amount at that time, it might be necessary to adjust income tax withholding on IRS Form W-4.


Adjusting Income Tax Withholding on Paycheck

The general system is that your employer withholds income tax from your paycheck based on the number of withholding allowances you claim on Form W-4, Employee’s Withholding Allowance Certificate. You must give your employer a Form W-4 when you first begin work and select a certain amount of allowances. Most people select one or two which is usually right.


How W-4 Withholding Work With Paycheck:

If your tax circumstances change,the responsibility is on the taxpayer to update their W-4 with employers. Many employees neglect to take this step, resulting in withholding that is either too high or too low. This could mean that taxpayers are essentially giving the government an interest free loan because they are allowing too high an amount of taxes to be withheld on their paychecks.

  • Eventually, the overpaid tax will be refunded once you file your return, you would have been better off using the money during the year to generate income or for personal purposes. In this case, you should reduce the amount your employer withholds to increase your regular take-home pay.
  • Taxpayers who have too little withheld and who owe substantial amounts. There paychecks will be bigger, but they will owe money when taxes are filed. They may also owe certain fines that are imposed on not paying the correct amount of estimated taxes. If this is your situation, you should increase your withholding. As a rough guideline, you should owe less than 10% of your tax bill come April.

Even if you have had too little tax withheld for most of the year, you still may be able to avoid a penalty by asking your employer to withhold additional amounts for the rest of the year. This is because the increased withholding at year’s end will be treated as paid equally throughout the year.


Most common person or financial changes that affect Form W-4 paycheck withholding:

  • Changes in income not subject to withholding: For example, an increase or decrease in rental income, interest income, dividends, capital gains, or IRA distributions.
  • Changes in filing status or exemptions: Getting married or divorced; you have a new child; a child is no longer a dependent
  • Changes in deductions and credits: You take out or pay off a mortgage; you become entitled to the dependent care credit, child tax credit, or the higher education credit; changes in medical, alimony, or job expenses
  • Changes in wage income: You or your spouse start or stop working, or start or stop a second job.
  • Changes in other taxes: You owe self-employment tax or employment taxes for your household workers.


Changes to paycheck withholding

There are many more factors that can result in changes to paycheck withholding. A wide array of factors play a role: exemptions, deductions, credits, marital status, your spouse’s income, and others.

To help taxpayers, the Form W-4 includes three worksheets that you may have to complete to determine the proper withholding. The best way to handle withholding on paychecks might be by trial and error.