Top 5 reasons to adjust your W-4 withholding

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.

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 read on to learn about five of the most common reasons to revisit your W-4 withholding.

What’s a W-4 and why should I pay attention to it?

When you fill out your W-4 form, you’re letting your employer know how much money to take out of your paycheck and send to the federal government on your behalf throughout the year.

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.

Here are five common reasons why you may want to review 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.

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.

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.

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

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.

What’s next?

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. That’s why regularly updating your W-4 is important to ensure you pay the correct amount of taxes. 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.

This article was adapted from TurboTax.