As the end of the year approaches, the IRS encourages taxpayers to consider a tax withholding checkup. When taxpayers take a close look to ensure the right amount of tax is withheld now, they can avoid an unexpected tax bill next year.
Who Should Consider a Withholding Check-Up?
Here are five examples of taxpayers who would benefit from a withholding check-up:
1. Taxpayers Who Received Large Tax Refunds in Past Years
- When a taxpayer has too much tax withheld from their paycheck, they pay too much tax during the year.
- They can change their withholding to have money upfront rather than waiting for a bigger refund.
2. Taxpayers Who Owed Taxes in Years Past
- Taxpayers with too little tax withheld might owe money.
- Under-withholding can lead to both a tax bill and an additional penalty.
3. People with a Second Job
- This includes people who work in the sharing or ‘gig’ economy.
- Taxpayers who work more than one job should check the total amount of taxes they have withheld and make adjustments as necessary.
- This ensures their withholding covers the total amount of the taxes they owe, based on their combined income from all their jobs.
4. Taxpayers Who Make Estimated Tax Payments
- Some taxpayers make quarterly estimated tax payments throughout the year. This includes self-employed individuals, partners, and S corporation shareholders.
- If these taxpayers also work for an employer, they can often forgo making these quarterly payments by instead having more tax taken out of their pay.
5. People with a New Job
- Taxpayers who start a new job should check their withholding to make sure they are having enough taxes withheld.
- Their total withholding should cover the income tax owed from their new and old jobs combined.
How to Adjust Withholding
To ensure their employer withholds the right amount of tax, employees can adjust their Form W-4, Employee’s Withholding Allowance Certificate.
In many cases, this is all they need to do. The employer uses the form to figure the amount of federal income tax to be withheld from pay.
Note: This takes time, so taxpayers should make adjustments as soon as possible so the changes can take effect during the final pay periods of 2017.
IRS Resources to Help
The IRS offers several resources that help taxpayers determine if they are having the right amount of tax withheld from their pay.
Frequently Asked Questions
What is a tax withholding check-up?
A tax withholding check-up is when taxpayers review their income tax withholding to ensure the correct amount is being deducted from their pay. This helps avoid unexpected tax bills or large refunds when filing taxes.
Why should I adjust my withholding if I received a large refund last year?
Receiving a large refund means too much tax was withheld during the year. Adjusting your withholding allows you to keep more of your money throughout the year instead of waiting for a refund.
Do gig workers need to check their tax withholding?
Yes, individuals with multiple jobs or income from the gig economy should review their total tax withholding to ensure it’s enough to cover their combined income. This helps prevent underpayment and potential penalties.
Can estimated tax payments be replaced by withholding?
In some cases, yes. Taxpayers who make quarterly estimated payments and also have wage income may be able to increase their paycheck withholding to eliminate the need for separate estimated tax payments.
How do I update my tax withholding?
To update tax withholding, employees can submit a revised Form W-4 to their employer. This form tells the employer how much federal income tax to withhold from the employee’s paycheck.