Are You Withholding the Correct Amount of Tax from Your Paycheck?

Employers usually withhold a certain amount of tax from your paycheck, based on the instruction in your W4 form, and pay it to the government on your behalf. Now, based on your withholding, you may either receive a tax refund or have to pay a tax bill. Either of these scenarios is not great. 

Receiving a big tax refund would mean your money was kept away for a whole year while it could have been earning a substantial interest. On the other hand, paying a big tax bill can be financially distressing if you aren’t prepared.

Due to this, it is necessary to check your withholding at least once a year. The IRS recommends taxpayers check their withholding if the tax law changes, early in the year, or when certain life changes like marriage, divorce, or a wage increment occur. If you find that your withholding may be incorrect, it’s best to use the IRS Withholding Calculator to recheck your withholding.

How To Know Your Withholding Rate Using The IRS Withholding Calculator

To know what your optimal withholding rate should be, here’s what you need to do:

Gather Your Latest Tax Return Document And Pay Stubs: You’ll want to carefully assess your tax returns and your pay stubs to know how much tax is being withheld from your income currently. If you don’t have your pay stubs, you’ll want to get in touch with your organization’s human resources department.

Key In Your General Information And Potential Tax Credits: When you open the IRS Withholding Calculator, you’ll need to enter information about your filing status, how many jobs you have, whether anyone can claim you as a dependent, and so on. You’ll also need to list any potential tax credits, which your past returns can help you estimate.

Enter Your Income And Withholding: Next, you’ll need to enter details of your income, including the gross wages, tips, salary, and bonuses you expect to receive during the year. Based on your most recent pay stub, you’ll need to also key in the total federal income tax that has been withheld to date and the federal income tax that was withheld from your most recent salary payout by your company.

List Your Deductions: You’ll need to take a look at your most recent returns to estimate the itemized deductions for the year, including any taxes paid, medical expenses, gifts to charity, etc., and enter this into the calculator.

Adjust Your Withholding: Once you enter these details into the IRS Withholding Calculator, you will be given instructions on how to go about updating the W4 form. Based on the information you entered, you may need to withhold an additional amount from your paycheck, change your filing status, or adjust the allowances.

Keep in mind the IRS Withholding Calculator is only as accurate as the data you enter. So, make sure to carefully enter the details that are required and adjust your W4 accordingly. Once you’ve reset your W4, make sure to revisit the calculation if there are changes in your life situation.