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Most employees in the U.S. use the pay-as-you-earn (PAYE) approach, where estimated income tax is withheld directly from each paycheck. This withholding is calculated based on information you provide to your employer on Form W-4. Your withholding determines how much income tax is deducted from your salary throughout the year.
However, as life circumstances change, you may need to update your W-4 to ensure that the right amount of tax is being withheld.
Key Takeaways
- W-4 withholding affects the amount of federal income tax deducted from your paycheck.
- Life changes, such as marriage, having children, or a second job, may require adjustments to your withholding.
- Adjusting your W-4 helps ensure you pay the appropriate taxes during the year.
Life-Changing Events That May Require Adjustments
- Marriage: If you are married and filing a joint tax return, your taxes may be impacted in one of two ways. If your spouse earns an income, your household withholding may need to increase. 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 the recipient does not include alimony in their taxable income (this may or may not change in the future).
- Birth or Adoption: The birth or adoption of a child adds a dependent to your household and lessens the overall tax burden. This can result in lower taxes due to tax credits and deductions. To take advantage of these benefits quickly, consider revising your withholding on your W-4.
- Major Expenses: When purchasing a home, you can update your withholding in anticipation of tax benefits. There are credits for first-time homebuyers, education, 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.
Tip
You may need to adjust your withholding when your children grow up and no longer qualify as dependents. This will reduce the number of exemptions you claim, increasing your taxable income and potentially increasing your withholding.
How to Complete Form W-4
The IRS Tax Withholding Estimator is a helpful tool to estimate how much income tax should be withheld from your paycheck. You can also use the following steps to complete Form W-4, which is available on the IRS website.
- Estimate Your Taxes: Use the IRS online Tax Withholding Estimator to estimate your federal income taxes.
- Notify Your Employer: Once you’ve determined the appropriate amount, submit a revised Form W-4 to your employer.
- Consider Multiple Jobs: If you and your spouse both work or you have more than one job, fill out Step 2 of the form to account for income from all sources.
- Account for Dependents: In Step 3, indicate any dependents you are claiming. This will adjust your withholding based on the number of dependents you support.
- Other Income: If you receive income other than wages, such as interest, dividends, or retirement income, enter this in Step 4(a).
- Deductions: If you expect to claim deductions beyond the standard deduction (such as mortgage interest or student loan interest), complete Step 4(b) using the Deductions Worksheet attached to Form W-4.
- Additional Withholding: If you expect to owe additional taxes (for instance, if you have non-wage income that isn’t subject to withholding), enter an additional withholding amount in Step 4(c).
- Verify Changes: After submitting your revised W-4, check your paycheck to confirm that the new withholding amounts are being applied. Changes to your withholding amount may be delayed by one or two pay cycles.
All pages of Form W-4 are available on the IRS website.
Is It Better to Withhold More or Less Taxes?
Withholding more means you will receive a tax refund when you file your return, but it also means you’re giving the government an interest-free loan. While this may be appealing to those who prefer to avoid paying a large sum at tax time, it also means you miss out on the opportunity to invest that money throughout the year.
On the other hand, withholding less puts more money in your pocket throughout the year, but it could leave you with a tax bill at the end of the year if you haven’t withheld enough. It’s important to balance your withholding to avoid both underpayment and overpayment.
Will Changing Withholding Affect My Paycheck?
Yes, adjusting your W-4 will directly impact your take-home pay. Increasing withholding will reduce your paycheck amount while decreasing withholding will result in more take-home pay. However, your gross income (before taxes) remains unchanged.
How Often Can I Revise My Withholding?
You can submit a revised Form W-4 at any time during the year. If your circumstances change—for instance, if you get married, have a child, or start a second job—you can adjust your withholding as needed. Employers are required to process updated W-4 forms promptly, and changes will typically take effect within one or two pay cycles.
The Bottom Line
Adjusting your W-4 withholding is an important step when major life changes occur. Keeping your withholding accurate can help you avoid a large tax bill or unnecessary overpayment come tax season. Regularly reviewing your W-4 and making updates as necessary is a simple way to ensure that you’re paying the right amount of tax throughout the year.
