Federal income tax withholding is key to avoiding unexpected tax bills at year’s end. Your employer plays a significant role in this by deducting taxes based on your earnings and the information you provide on Form W-4. Understanding this process and using tools like the IRS Tax Withholding Estimator can help you manage your taxes more effectively.

 

How Your Withholding is Determined

The amount of income tax withheld from your paycheck depends on:

  • Your Earnings: Higher earnings may place you in a higher tax bracket, increasing the taxes withheld.
  • Form W-4 Details: The information you provide about your marital status, dependents, and additional income determines how much tax is withheld.

Considerations for Couples Filing Taxes Jointly

When married couples file as “Married Filing Jointly” (MFJ) on Form W-4, it’s important to understand that employers generally withhold less tax from their paychecks. This is because the withholding is calculated under the assumption of a single income per household. However, if both spouses are earning, this can result in not enough tax being withheld. To prevent tax underpayment, consider filing as “Single” or “Married Filing Separately” (MFS) on your W-4, or choose to have additional taxes withheld. These adjustments help ensure that the correct amount of tax is withheld, avoiding surprises at tax time and potential penalties.

 

Using the Tax Withholding Estimator

The IRS Tax Withholding Estimator helps you check if the right amount of tax is being withheld, based on your current financial situation ( earnings, tax credits, deductions, etc.).  To use this tool, you’ll need:

  • Paystubs for you and your spouse, if applicable.
  • Information on any additional income like side jobs, investments, etc.
  • Your most recent tax return for reference.

The Tax Withholding Estimator does NOT require personal details like your name, social security number, address, or bank account numbers. Additionally, the IRS does NOT store or keep a record of the information you input into the estimator. There is NO need to create an account to use this tool.

 

Adjusting Your Withholding

To change how much tax is withheld:

  1. Use the Estimator Tool: The estimator provides specific instructions based on the data you input, such as adjusting for bonuses, or accounting for other Income (rental income, dividends, or capital gains, etc.)
  2. Complete a new Form W-4: Inform your employer of your withholding amount

Best Times to Check Your Withholding

  • At the start of the year or after any major life events like marriage, divorce, the birth or adoption of a child, or buying a home
  • When your income changes, due to starting a new job or receiving a bonus

Properly managing your tax withholding can prevent surprises during tax season and help maintain your financial stability. Regularly using the IRS Tax Withholding Estimator and adjusting your Form W-4 can keep your tax payments in line with your actual tax liability. This proactive approach ensures you are neither overpaying throughout the year nor facing a large tax bill when filing your returns.

 

Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.