Key Takeaways
- Form W-4 tells your employer how much federal income tax to withhold from your paycheck based on your filing status, tax deductions and credits, and other factors.
- The amount of federal income tax withheld from your paycheck directly affects your take-home pay. Accurate completion of Form W-4 can help maximize your take-home pay.
- Over-withholding can result in a large tax refund, which is essentially an interest-free loan to the government. Adjusting your withholding can provide you with more money throughout the year rather than waiting to get your money back until you file your tax return.
- Adjusting your withholding is straightforward: just fill out a new Form W-4 and submit it to your employer's human resources or payroll department. Using tax withholding calculators can help determine the correct amounts to input on the form.
Managing your withholding
Taking steps to reduce your tax liability can benefit you at tax time, but you may also benefit throughout the year by adjusting your withholding to increase your take-home pay. If you want a bigger paycheck and a smaller tax refund, you can use Form W-4 to make it happen.
How much can adjusting your withholding help? The IRS reported that 2021 tax returns resulted in an average tax refund of $2,815. If the average filer gets paid every other week, that tax refund could have added $100 to each of their paychecks and still resulted in a $216 refund for the year.
The federal taxes you pay throughout the year
Your paychecks likely include a line item showing how much federal income tax was withheld from your pay. This money is sent to the federal government many times each year and represents a payment against the federal taxes you'll owe when you prepare your tax return.
Typically, you're required to pay federal income tax as you earn income throughout the year. If you're self-employed and don't receive a paycheck, you'll generally make estimated tax payments on a quarterly basis.
Each year, you'll file a federal income tax return to reconcile what you actually owe for the prior year with what you paid in.
- If you paid in more than you owe, you get a refund.
- If you paid too little, you will owe more tax.
Form W-4 tells your employer how much tax to withhold
So, how does your employer know how much federal income tax to withhold? While your employer already knows how much they pay you, Form W-4 collects what they don't know — filing status, tax deductions, and more — to calculate the amount to withhold using the IRS withholding tables.
- The amount of federal income tax withheld from your paycheck reduces your take-home pay. So, it's important to fill out Form W-4 accurately. Doing so will allow you to maximize your take-home pay, minimize your tax refund — if that's your goal, or minimize the amount that you owe.
- Many people only fill out a Form W-4 when they're hired and don't think to update it until they start a new job. Even though this is common, you should submit a new Form W-4 with your employer whenever you have any major tax situation changes. If you don't fill out a new form, your employer won't know to adjust your federal income tax withholding to account for the change.
Why an interest-free loan to the government isn't ideal
People love tax refunds. Giving that money to Uncle Sam to hold on to isn't ideal, though. When the federal government keeps the money for you, you lose the opportunity to use the money in other ways.
- Having extra money in your paychecks throughout the year could help you achieve your financial goals faster.
- You could use the money to pay off debt throughout the year, saving money on the interest you would have paid waiting for your refund.
- If you're saving for a vacation, you won't earn interest letting the federal government hold your money as you would if you put the money in a high-yield savings account.
TurboTax Tip:
It's important to submit a new Form W-4 whenever you have major tax situation changes, such as a change in marital status or the birth of a child, to ensure your withholding is adjusted accordingly.
How to change your withholding to adjust your tax refund
Adjusting your tax withholding isn't difficult. All you need to do is fill out a new Form W-4 and give it to the correct department at your employer. Most often, this is the human resources or payroll department.
The Form W-4 only requires you to fill out a few lines of information and tax withholding calculators can help you figure out what to input on each of those lines. To use it, you'll need to know some basic information about your tax situation. These factors typically include:
- filing status
- number of dependents you plan to claim on your return
- age of those dependents
- information about pay from jobs
- pension income
- contributions to tax-advantaged accounts such as 401(k)s, HSAs, FSAs, IRAs
- adjustments to income such as student loan interest paid
- whether you take the Standard Deduction or itemized deductions
- any tax credits you take advantage of
- other sources of income and tax payments
When reviewing the last item in the list — other sources of income — be sure to consider investment income such as:
- interest
- dividends
- capital gains
- rental income
- alimony
These are not usually subject to withholding but most likely affect the amount of tax that you have to pay, and so reporting it on your W-4 could be beneficial.
The required information can usually be found on your prior year's tax return or your current pay stubs. You'll need to make adjustments for changes from the previous year to make sure it reflects your current situation.
Once you complete the form, give it to your employer. Then, keep a close eye on your next few paychecks to see how the changes impacted your federal income tax withholding.
- If you make a change in the middle of the year, it's wise to fill out a new form at the beginning of the next year. The adjustments made may result in incorrect results if enacted for a full tax year rather than just part of a year.
- Filling out a new Form W-4 at the beginning of the year should put you on track for the future.
If you don't know whether you'll likely receive a refund or owe money, TurboTax’s tax withholding calculator can help you figure out what to expect. Then, you can decide if you need to fill out a new Form W-4.
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