Now that tax season has arrived, you might be wondering whether or not you’ll owe the government money. How much you owe or how much you’ll receive in a refund depends a lot on your tax withholdings from your paychecks during the year.
You’ve probably been dealing with withholdings since you were first employed, but many people still don’t know what that means. It’s vital to make sure you’re getting the right amount taken out so you’re not surprised by a bill come tax time. And although your employer does the work of collecting the funds, it’s your job to ensure the amounts are right.
Here’s what you need to know about tax withholdings, including when and how to adjust them.
What Are Tax Withholdings?
Tax withholdings are the wages your employer sets aside for the purpose of paying federal and state income taxes. In short, it’s money you earn that you never see because it’s funneled directly into Uncle Sam’s hands.
Tax withholdings are determined by IRS Form W-4, which you fill out when you start a new job or when you want to adjust your withholdings — which we’ll get to in just a moment. You can see the exact dollar amount of your tax withholdings on your pay stub each pay period, and you can adjust your withholdings by submitting a new W-4 as often as you wish.
How Are Tax Withholdings Calculated?
Your employer calculates your tax withholdings based on your responses to the W-4 form. The W-4 form was redesigned in 2020 to help people more accurately calculate their federal income tax withholdings. The IRS mandates this new form for new employees, but if it’s been a couple years since you’ve submitted a W-4, your withholding might still be calculated based on the old form.
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If you haven’t updated your W-4 recently, here’s how the W-4 has changed.
New W-4 Forms 2020
The W-4 (Employee’s Withholding Allowance Certificate) was redesigned in 2020 to make it easier to use and to complement the 2018 tax laws.
The new W-4 Form removes withholding allowances — so there’s no more calculating 0s and 1s to understand your tax withholding. The new design is divided into five parts, designed for accuracy and ease of use. Here is what you need to provide:
- Personal information
- Multiple jobs or spouse works
- Claim dependents
- Other adjustments
- Your signature
Sections 1 and 5 are required, but you fill out 2 through 4 only if they apply to your specific situation. For the most part, this form makes things straight forward and you just fill it out as you go along, but things can get a little complicated if you have multiple incomes or want to file your own individualized deduction.
There are forms and worksheets for each calculation, but we particularly love the simplicity of using the IRS’ tax withholding calculator tool to help figure out any difficult steps.
Use the IRS Withholding Calculator Tool
The simplest way to figure out how much should be exiting your paycheck each month is the IRS’ tax withholding calculator tool. But if you’re interested in the nitty gritty of how your employer should approach it, here are the basics of how your employer calculates your withholding.
Using the information from your W-4, your employer calculates your taxable income and then references the appropriate tax table. From there, employers can calculate withholdings through the percentage method or the wage bracket method.
The wage bracket method is considered the simplest method because the IRS chart shows you the exact amount to withhold based on the employee’s taxable income, marital status, deductions, etc. The downside is that the bracket method is manual and only covers incomes less than $100,000.
Because of that, the percentage method is the most common withholding method because it coincides with companies’ automatic payroll systems and works for any wage.
The percentage method is based on the tax rates as shown in the table below.
Keep in mind the income thresholds for the 2023 tax brackets (for filing in 2024) were adjusted significantly from 2022 because of inflation. Meaning, you may be in a lower tax bracket than you were in previous years.
Wage Brackets at a Glance for 2024 Tax Season
| Tax Rate | Single | Married Filing Jointly or Qualifying Widow | Head of Household |
|---|---|---|---|
| 10% | $0 to $11,000 | $0 to $22,000 | $0 to $15,700 |
| 12% | $11,001 to $44,725 | $22,001 to $89,450 | $15,701 to $59,850 |
| 22% | $44,726 to $95,375 | $89,451 to $190,750 | $59,851 to $95,350 |
| 24% | $95,376 to $182,100 | $190,751 to $364,200 | $95,351 to $182,100 |
| 32% | $182,101 to $231,250 | $364,201 to $462,500 | $182,101 to $231,250 |
| 35% | $231,251 to $578,125 | $462,501 to $693,750 | $231,251 to $578,100 |
| 37% | $578,126 or more | $693,751 or more | $578,101 or more |
So if you’re single and you made $50,000 in 2023, your income places you in the 22% tax rate. You would owe $5,147 plus 22% of excess over $44,725. This would come to a total of $6,307.51 of withholdings to cover your federal income tax this year.
This withholding would be divided up across your paychecks for the year. So if you receive biweekly paychecks, then each paycheck would have around $252.30 withheld to cover your taxes.
It’s your employer’s responsibility to withhold this money for you, but we think it’s always a good thing to be informed. Again, the IRS tax withholding calculator tool can help you get a general idea of how much money will be withheld.
When to Adjust Your Tax Withholdings
Filing new tax paperwork is nobody’s favorite pastime — except maybe if you’re a CPA. (Probably not for them, either, though.)
But keeping your tax withholdings up to date is the best way to ensure you’re paying the proper amount in taxes, which can help you avoid underpayment penalties and also keep as much of your money as possible in your pocket.
Here are three scenarios in which you’ll want to adjust your tax withholdings.
1. You Get a New Job
If you change jobs entirely, you probably won’t have to think about filing a new W-4 — your friendly HR rep will simply slide one across the table. But if you start working multiple jobs, take note: You can’t claim the same allowances twice, so you’ll likely need to go back into your original job’s W-4 and make adjustments.
2. You Go Through a Major Life Change
If any of the following scenarios apply, it may be time to change your tax withholdings.
Having a child increases your number of dependents by one. Congratulations! We know you’re busy, but try to find time to file a new W-4. Maybe during naptime.
Getting married can change your filing status, particularly if you plan on filing your taxes jointly. Depending on your new spouse’s income, your overall household tax rate may increase or decrease. The same goes for if you get divorced.
Buying a house can reduce your overall tax liability since most mortgage interest and property taxes are deductible. You’ll save money throughout the year if you adjust your W-4 immediately rather than waiting until Tax Day to inform the government about your new digs.
Earning non-wage income, like side hustle cash or investment gains, can affect your tax status — so if you start a rental property business or you’re making bank by driving for Uber on your off hours, you’ll need to check your W-4.
3. You Get a Hefty Tax Refund — or Owe Uncle Sam
As nice as it is to see that pre-summer windfall, getting a tax refund basically means you’ve given the government a yearlong interest-free loan. You could have been putting that money to better use yourself during that time, particularly if you invested it and let it grow.
On the flip side, if you find out you owe money at tax time, adjusting your withholdings might keep you from desperately scrounging in the couch for spare change during your spring cleaning spree.
Need a cheat sheet? Have we mentioned that the IRS provides a handy tax withholding calculator tool? The calculator can tell you whether your forms are in need of an adjustment. It’ll only take a few minutes, but you’ll want to gather your recent pay stubs and last year’s tax return before you get started.
How to Adjust Your Tax Withholdings
If you’ve determined you do need to adjust your tax withholdings, all you need to do is file a new W-4 with your employer. Many companies keep all their tax forms and documentation online, so you might not even have to put pen to paper.
Contact your company’s HR department (or whoever’s in charge of tax documents and compliance) for specific instructions. And if your adjustments do mean you get to keep more of your paycheck, don’t just blow it! Use it to start an emergency fund, or stick it in an interest-accruing retirement account for later.
Contributor Whitney Hansen writes for The SS on personal finance topics including banking and investing. Reporting from former contributor Jamie Cattanach is included in this report.
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