When to Review Your Tax Withholding

In this topic, you'll learn:

• How withholding tax works.
• Signs that you should consider a review of your W-4.

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One critical aspect of tax planning is your W-4 form, which determines how much tax is withheld from your paycheck. Changes in your financial situation or life events can impact your tax liability, so it's important to know when to adjust your W-4 withholding.

How Withholding Tax Works
Withholding tax is a portion of your income that's withheld by your employer to pay your income tax liability. When you start a new job, you’ll fill out your W-4 form which tells your employer how much you want to have withheld from each paycheck. Your employer then withholds that amount and sends it to the government on your behalf.

The purpose of withholding tax is to help you avoid having to pay a large lump sum come tax season. By having a portion of your income withheld from each paycheck, you're essentially paying your income tax in installments throughout the year.

The amount of withholding tax that's taken out of your paycheck is based on the information you provide on your W-4 form. This form asks for your filing status, number of dependents, and any additional withholding you want to request. Your employer then uses this information to calculate the amount of withholding tax to be taken out of your paycheck.

It's important to note that withholding tax is just an estimate of the tax you'll owe come tax season. So it's possible to have too much or too little tax withheld from your paycheck. 

When to Review Your W-4
Here are some life and career situations that may warrant changes to your W-4:

• You owe taxes at tax time. If you find yourself owing money at tax time, it's an indication that your withholding was too low. To avoid this, you may want to increase your withholding by claiming fewer allowances on your W-4 form.

• You receive a large refund. While it may feel good to get a large refund, it means that you've been overpaying your taxes throughout the year. To avoid this, you may want to decrease your withholding by claiming more allowances on your W-4 form.

• You experience a change in income. If your income changes, you may need to adjust your W-4 withholding to ensure that you're paying the right amount of taxes.

• You get married. Married couples can choose to file jointly or separately, and each filing status has different tax implications. 

• You have a child. The birth or adoption of a child can significantly impact your tax situation. You may be eligible for new tax credits, such as the Child Tax Credit or the Child and Dependent Care Credit, or you may experience changes in income.

• You start a side hustle. If you start a side hustle or become self-employed, you may need to make estimated tax payments throughout the year. You may also need to adjust your W-4 form to reflect any changes in income or deductions resulting from your side job.

• You get divorced. If you go through a divorce, you may need to adjust your W-4 form to reflect your new filing status. You may also want to update your withholding to reflect any changes in income or deductions resulting from the divorce.

• There are tax law changes. Tax law changes can affect your tax liability and may require you to adjust your withholding to avoid over- or under-paying income taxes.

How to Change Your Tax Withholding
Fortunately, you can change your tax withholding at any time to ensure that you're paying the correct amount of taxes throughout the year. To change your tax withholding, you'll need to submit a new W-4 form to your employer – it’s that easy. 

Changing your tax withholding can be a simple but important step in ensuring that you're paying the correct amount of taxes throughout the year. If you're unsure about your tax status, don't hesitate to seek the advice of a tax professional or use resource like the IRS's Tax Withholding Estimator.