Key Takeaways
- How much your employer sets aside to pay federal taxes on your behalf is determined by the information you provide on your Form W-4. Having too little withheld from your paychecks could mean an unexpected tax bill or even a penalty for underpayment.
- If you have a side job that doesn’t have any tax withholding, you could submit a new W-4 to adjust the withholdings at your main job to account for the increase in income.
- If you were unemployed during the tax year, you likely had too much tax withheld while you were working. If you get rehired in the same tax year, you should adjust your withholding on a new W-4 to avoid paying too much tax.
- If you get married or get a divorce during the tax year, your new tax status can affect your tax rate. Be sure to update your withholding accordingly.
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. Your employer's tax payments for you are based on the information you submit on your Form W-4.
When too much money is withheld from your paychecks, you give Uncle Sam an interest-free loan. You then get a tax refund. But if too little is withheld, you might get an unexpected tax bill. You might even face 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. How much you have withheld impacts your refund.
Some life events result in more taxes. Others give you 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 with no tax withholding, you could submit a new W-4. It would adjust the withholdings at your main job for the extra income.
2. Your spouse gets a job or changes jobs
A change in household income, up or down, could put joint filers in a different tax bracket. This could mean that one or both of you should change 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 people who file jointly get a lower tax rate. They also get other deductions. These benefits are not available to those who file 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 can be a major tax event, too.
You can include the amount of the Child Tax Credit that you will get in your W-4 if you are eligible. Just remember, any advance payment you receive during the year will be subtracted from the credit you expect on your tax return. You would have already received this money.
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.
TurboTax Tip:
If you're eligible for tax credits, you can reduce your withholding to account for the added tax benefits. These credits can include the Child Tax Credit or the child adoption tax credit.
Child Tax Credit Changes
The Child Tax Credit changed for tax year 2021. It provides help for struggling families hit by the pandemic. The American Rescue Plan raised the most Child Tax Credit in 2021 to $3,600 for kids under 6 and to $3,000 for kids 6 to 17. Before 2021, the credit was worth up to $2,000 per eligible child. Those 17 years old and up were not eligible for it.
The 2021 Child Tax Credit has lower income limits. They are lower than the original Child Tax Credit. Families that do not qualify for the credit under the new income limits can still get the $2,000 per-child credit. They can use the original Child Tax Credit income and phase-out amounts.
In addition, the entire credit is fully refundable for 2021. This means that eligible families can get it, even if they owe no federal income tax.
New, Temporary Advance Child Tax Credit Payments
The Child Tax Credit has been expanded by the American Rescue Plan Act, which was enacted in March of 2021. Part of this expansion is to advance the 2021 tax credit to families. It will do this by sending them direct payments in 2021. This is instead of having them wait until they prepare their 2021 taxes in 2022. Most families do not need to do anything to get their advance payment. Normally, the IRS will calculate the payment amount based on your 2020 tax return. Eligible families will receive advance payments, either by direct deposit or check.
You will receive a certain amount. It will be compared to what you are eligible for when you prepare your 2021 taxes. Most families will get about half of their tax credit in advance. If you receive too little, you will be due an additional amount on your tax return. You might get too much. Then, you might have to pay it back. It depends on your income.
For updates and more information, please visit our 2021 Child Tax Credit blog post.
How to adjust your W-4 withholding
The IRS replaced the old W-4 format with a new system beginning in 2020. The new W-4 tries to be more accurate in estimating your tax withholding. This lets you get closer to owing $0 or getting a $0 refund when you file your tax return.
The new W-4 system:
Aims to reduce the complexity of calculating how much to withhold. It also aims to increase the transparency and accuracy of the 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 W-4 calculator's result differs from your current withholding, ask your employer for a new W-4 form.
If you're married and both work but earn different incomes, you can use the Step 2(b) — Multiple Jobs Worksheet. It shows how much extra tax the higher earner will need to withhold in box 4(c).
The new W-4 also lets you estimate how much you plan to deduct on your 1040. You can claim itemized deductions or the Standard Deduction. Then, you put this amount in box 4(b).
You can report income from other sources (not a job) in box 4(a). This will 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.
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