Common lifestyle changes, like getting a job or getting married, can change your tax liability. To avoid being caught off guard by an unexpected tax bill or a huge tax refund, you'll need to adjust your withholdings on your paycheck.
What's a W-4 and why should I pay attention to it?
Every time you earn income, you'll most likely owe income taxes. How much your employer sets aside to pay on your behalf is determined by the information you submit on your Form W-4.
When you have too much money withheld from your paychecks, you end up giving Uncle Sam an interest-free loan (and getting a tax refund). On the other hand, having too little withheld from your paychecks could mean an unexpected tax bill or even a penalty for underpayment. The key to paying the right amount of tax is to update your W-4 regularly.
- Do this whenever you have a major personal life change.
- The goal is to reduce the potential for a tax bill and have a tax refund at zero or close to it.
- If you count on a big tax refund every year, you should also pay attention to your withholding because how much you have withheld directly impacts your refund.
Some life events result in more taxes, while others entitle you to credits and deductions that lower your taxes. The list of these events is long, but here are 5 of the most common reasons to revisit your W-4 withholding.
1. You get a second job
Getting a second job is the most common reason for needing to adjust your W-4. Do this whether you moonlight, have a home business or get another full-time job.
Any time your income goes up, your tax liability will likely go up too, requiring a new W-4. If your extra income comes from a side job that doesn’t have any tax withholding, you could adjust the W-4 withholdings at your main job to account for the increase in income.
2. Your spouse gets a job or changes jobs
Any change of household income, whether up or down, could put joint filers in a different tax bracket and require both of you to modify your withholdings. To ensure accuracy, use your combined income to figure out the appropriate withholding.
Use TurboTax's W-4 Withholding Calculator to determine the amount of withholding you should state on you and your spouse's W-4s.
3. You’re unemployed part of the year
If you get laid off from your job and stay unemployed the rest of the year, you likely had too much tax withheld while you were working. So, if you get rehired in the same year, you'll need to adjust for the downtime. To avoid paying too much tax, you should adjust your withholding on a new W-4. We'll show you how to do that below.
4. You get married…or divorced
Tying or untying the knot will most likely change your tax rate, especially if both spouses work. Married persons filing jointly qualify for a lower tax rate and other deductions than filing as single. Getting a divorce can take you back to single or head of household status and reverse many tax benefits. If you fail to account for these events on your W-4, your withholdings could be inaccurate.
5. You have a baby…or adopt one
A new baby is more than a bundle of joy. It's can be a major tax event, too. If you earn under $200,000 as a single filer or $400,000 as married filing jointly, you can include your qualifying dependent child on your W-4.
This will account for the $2,000 Child Tax Credit. If you adopt a child, there's potentially another tax credit. Any of these could allow you to reduce your withholding to account for the added tax benefits.
How to adjust your W-4 withholding
In the past, you typically filed a new form when you started a new job or you wanted to adjust W-4 withholdings based on your tax situation. However, the IRS replaced this format with a new system beginning in 2020.
The new W-4 system:
- Aims to reduce the complexity of calculating how much to withhold and increase the transparency and accuracy of the withholding system.
- Uses the same underlying information as the old design.
- Replaces complicated worksheets with more straightforward questions.
It's easy to adjust your withholding. You can do it on paper or electronically. The old-fashioned way is to walk through the worksheets on the W-4 form.
An even easier way is to use the TurboTax W-4 Calculator. This simple tool makes determining your withholdings easy. Just answer the questions and the withholding amount is computed for you.
- If the result from the W-4 calculator is different from your current withholding, ask your employer for a fresh W-4 form to fill out.
- If you're married and both of you work but earn different levels of income, you can use the Step 2(b) — Multiple Jobs Worksheet to calculate how much extra withholding the higher earner will need to withhold in box 4(c).
- The new W-4 also allows you to approximate how much you plan to deduct on your 1040 (either claiming itemized deductions or the standard deduction) and place this in box 4(b).
- Should you have income from other sources (not a job), you can report it in box 4(a) to change how much money your employer withholds from your paycheck.
You can adjust your W-4 at any time during the year. Just remember, adjustments made later in the year will have less impact on your taxes for that year.