When you first start working for a new employer, you fill out a Form W-4, Employee’s Withholding Allowance Certificate, which lets your employer know how much federal income tax should be withheld from your pay.  But after you have submitted this form, you may experience changes that affect your tax liability.  You can provide your employer with a new W-4, changing your withholding to more closely match your actual tax liability.

When To Check Your Withholding

If your personal and financial situation has not changed significantly since last year, and when you filed your return for last year you did not owe tax and your refund was not excessive, you probably do not need to be concerned about your withholding tax.  But if your situation changes, the earlier you check your withholding, the easier it will be to have the right amount of tax withheld for this year.

There are certain times in particular when you should check your withholding to determine if too much tax, or not enough tax is being withheld:

• When you receive a paycheck for the new year that covers a complete pay period, so that you can check your withholding based on current year tax rates.
• When you prepare your tax return for last year and you find that you owe tax or you have a larger refund than you expected.
• When you experience changes in your personal life or in your financial situation that affect your tax liability.
• When there are tax law changes that affect you.

When you have a change that decreases the number of withholding allowances you are qualified to claim, such as if you get a divorce when you have been claiming married status, you must give your employer a new W-4 within 10 days.  If you have a change that increases the number of withholding allowances you are qualified to claim, such as when you have been claiming single status and you get married, you are not required to submit a new W-4, but it may be to your advantage to do so.

When You Receive a Paycheck

Once you receive a paycheck for a full pay period, you will have a clear idea of your income and withholding tax.  You can then check your withholding by estimating your tax liability for the year and comparing this to the total projected withholding tax for the year.  The Internal Revenue Service (IRS) provides worksheets to help you do this.  IRS Publication 919, entitled “How Do I Adjust My Tax Withholding?” has various worksheets that will help you through the process of estimating your tax liability and projecting your withholding.    Worksheet 1 is to project your total federal income tax liability for the year, and worksheet 2 is to project your total income tax withholding.  You can also use the “IRS Withholding Calculator”, which is a program the IRS offers on its website.  You can access this program by selecting “Individuals” under “Information for:” on the IRS home page. The IRS Withholding Calculator will appear on the next page that comes up.

When You Do Your Tax Return for Last Year

When you file your annual income tax at the end of the year, you will know how your withholding matched up with your actual taxes for last year.  This may be a good time to adjust your withholding by giving your employer a new W-4.  If you ended up owing tax, you may need to reduce the number of withholding allowances so that more tax is withheld.  And if you received a large refund for last year, and the level of your income, adjustments, deductions, and credits has not changed substantially this year, you may want to increase the number of withholding allowances so that less tax will be withheld and you will have use of this money during the year, instead of waiting for a refund after the end of the year.

When You Experience Changes in Your Personal Life

You may need to check your withholding tax when you experience significant events in your life, such as getting married or divorced, having a child or adopting a child, or gaining or losing a dependent.  Becoming a homeowner is a change that will provide you with the opportunity to claim itemized deductions that you could not have previously claimed, such as mortgage interest and property taxes.  Your retirement is also a significant event in your life that can have an important effect on your taxes.

If your spouse dies, you can still use the married filing jointly status for the year of your spouse’s death.  If you are a qualifying widow(er) with dependent child, you may still qualify for the lower tax rate for two more years.  But if you do not qualify, you may need to change your withholding to a single status.

When Your Financial Situation Changes

Changes in your financial situation include changes in the level of your income, changes in the type of income you receive, and changes in the adjustments, deductions or credits you can claim for tax purposes.

For example, if you are married and your spouse began working, stopped working, or if either of you had significant changes in your income, one of you or perhaps both of you may have to adjust your withholding.  If you (or your spouse, if married) started or stopped working at a second job, this will also affect your overall income and your taxes.  A new job, a promotion, or a layoff may also have significant effects that need to be taken into account.

If you have significant increases in your income other than the salary or wages you earn, such as interest, dividends, capital gains, or rent, you may have to either adjust your withholding, or make estimated tax payments.  If your salary or wages are not sufficient to have enough tax withheld to cover your tax liability on sources of income that are not subject to withholding, you may need to pay estimated taxes.

If you start your own business, your earnings will not be subject to withholding.  And your business earnings will be subject to self-employment tax (the equivalent of social security and Medicare tax) in addition to federal income tax.  You will have to cover these taxes during the year either through the withholding tax on the pay you receive from an employer, or by making estimated tax payments.

Your adjustments to income, itemized deductions, and tax credits may vary from one year to another.  Adjustments to income include deductions for IRA contributions, moving expenses, tuition and fees, interest on a student loan, and alimony paid.  Itemized deductions include medical expenses, charitable contributions, mortgage interest, sales tax, and job-related and other miscellaneous expenses.  Significant variations in your adjustments to income or your itemized deductions can affect your tax liability for the year.  You may need to determine their effect and adjust your withholding accordingly.

Tax credits include the earned income credit, child tax credit, child and dependent care expense credit, and the education credits, including the Hope and lifetime learning credits.  You may qualify for tax credits for which you did not qualify before, or there may be new credits available to you.  This could reduce your ultimate tax liability, and you may want to adjust your withholding in expectation of a lower tax.

When There Are Changes in the Tax Law

The IRS generally publishes information on its website about changes in the tax law.  Also, IRS Publication 553, “Highlights of (Year) Tax Changes” will provide you with information on the tax changes from one year to the next.  This publication can be downloaded from the IRS website.  You should review the principal changes in the tax laws to see how they affect your taxable income, adjustments, deductions, and credits.  Certain credits or deductions may expire, and new credits and deductions may go into effect.

You can also look at the amounts that generally change from year to year, such as the amount of the personal and dependent exemptions, the standard deduction, and the limits or phase-out amounts that apply on certain deductions or credits to see how they may affect your tax liability.

How To Adjust Your Withholding

You adjust your withholding by giving your employer a new Form W-4.  You can change the amount that is being withheld by changing any of the information you reported on the W-4 you originally gave your employer, that is, the filing status, number of withholding allowances, or the additional amount to be withheld. You should give your employer a new Form W-4 as soon as possible whenever you experience a significant event that changes your income tax status, and whenever you become aware that the information you included on the Form W-4 you originally submitted no longer applies.  You can submit a new W-4 at any time you wish, and for any reason, to change your filing status, change the number of withholding allowances, or request an additional amount to be withheld that is more or less than what you originally submitted.

Increasing Your Withholding

You can increase your withholding by either decreasing the number of withholding allowances you are claiming on line 5 of Form W-4, or by indicating an additional amount to be withheld on line 6, or increasing that amount if you had previously indicated an additional amount to be withheld.

You can calculate the additional amount to be withheld by completing Worksheet 1, Projected Tax, and Worksheet 2, Projected Withholding, in IRS Publication 919.  If you change the additional amount to be withheld based on the calculations from these worksheets, you would not change the number of withholding allowances on your Form W-4.  You would leave this number the same as it was on the last W-4 you gave your employer, and would change only the additional amount to be withheld.

Decreasing Your Withholding