Keeping your tax withholding up to date

It’s recommended that you check your federal income tax withholding at least once a year. You might periodically need or want to adjust the amount of tax withheld from your pay.

Ideally, your employer should withhold enough tax so that by the end of the year, the total amount withheld will line up closely with the amount of tax you’re required to pay for the year. If you end up owing a lot of money to the IRS at tax time, you might have trouble finding enough cash to pay the amount due, which might include interest and penalties on top of tax. If you get a big refund, it will mean you basically gave the IRS an interest-free loan during the preceding year.

Indicators that you might need to adjust your withholding

Your employer may already be withholding an appropriate amount of tax from your paycheck. However, if the return you filed last year reflected a substantial underpayment or overpayment, you should definitely revisit your withholding if you haven’t already done so in the current year.

Even if your withholding was on target last year, giving it a fresh look is important, especially if any of the following situations apply to you:

• You have significant nonwage income, such as interest, dividends or alimony, or the amount of your nonwage income has changed more than a little since you last submitted a completed W-4 (the federal withholding form) to your employer.
• Your filing status is “married, filing jointly” and your spouse started or stopped working since you last submitted a W-4.
• You or your spouse are working more than one job.
• You’ve had a major life change (such as a marriage, divorce, job change or promotion (pay increase or decrease); the birth or adoption of a child; or the purchase of a new home) that might affect your eligibility to take certain tax deductions or credits.

How to check your withholding

For help with figuring out how much tax to have withheld from your pay, use the IRS’s Tax Withholding Estimator. Compare the result you get from that tool with the amount of tax currently being taken out of your pay.

How to change your withholding

After using the Tax Withholding Estimator, if you find that your withholding is due for an update, you can change it by completing a new W-4. You can either get this form from your employer or download it here.

The IRS simplified and shortened the W-4 in 2020 to make it easier to understand and allow for more accurate withholding and fewer surprises at tax time. Complicated worksheets were replaced with a series of questions about your income and dependents.