Key Considerations for W-4 Paycheck Withholding Amounts

3/31/2021 6 minute read

Learn what to consider when it comes to your W-4, paycheck and tax withholding amount.

Key Considerations for W-4 Paycheck Withholding Amounts
 
 
The Basics of Withholding Taxes
 Of all the tax advice out there (and there’s plenty) nothing matters as much as the amount of withholding you select on your W-4—it’s that one-page form you filled out your first day on the job to inform your employer and the IRS how much to withhold from your paycheck each month. How you fill it out and the choices you make here could make a big difference in your take-home pay, and how much you give or get from the IRS come spring.
 
Most people fill out their W-4 when they first start a job and never think about it again. However, it's never set-in stone, and it pays to make sure you have the right amount of taxes withheld to align with your personal financial goals for the upcoming year. If you need to adjust as you go, you can revise it as often as you like. Just ask your HR department or download a W-4 form online at irs.gov.



 
What is the right amount to withhold?
 That’s the right question to ask, but there’s not really a wrong answer. It all depends on how many Claimed Dependents you designate on your W-4. The more dependents you claim, the less income will be withheld (bigger paycheck), and by contrast, if you claim zero dependents, you will have the most tax taken out (smaller paycheck).
 
While it might seem slightly more advantageous to play it safe (with zero dependents, more withheld) so you are not shocked with an unexpected tax bill, you shouldn’t let Uncle Sam hold onto the money you could be putting toward expenses such as rent, mortgage payments, paying down debt and clearing a path for you to start building financial slack.

 
 
When is the best time to check your withholding?
 When it comes to your W-4, it’s yours to check (and revise) as often as you like. Generally, though, a good time to check is early in the year, if the tax laws change, and definitely if you have big changes in your life such as a wedding, divorce, a new baby, buying a home, retirement, and more.
 
Depending on circumstances, you should adjust your withholding whenever you think you're having too much or too little taken out. You’d be surprised how much an adjustment pays off. Let’s say you want to buy a house—if you revise your W-4 to claim additional dependents, you can reduce your withholding and instead of waiting for a tax refund, you’ll have extra money every month to help meet your goals. Win-win.



 
How to estimate withholding?
 To estimate the right amount of money you should withhold each month, we’ve included a few options below.
 
 
Use a Tax Withholding Estimator
This tried-and-true method is a great option if you have a bit more complex tax situation. You’ll enter factors such as your eligibility for child and dependent care tax credits, whether you contribute to a tax-deferred retirement plan (and how much) or health savings account, and how much you had withheld from your most recent paycheck. Based on these answers, you’ll receive an estimated tax obligation for the year, the amount you have paid through withholding by year's end, plus the amount expected in either “overpayment” or “underpayment.” Visit www.irs.gov/W4App for a useful tax estimator provided by the IRS.
 
Hire a Professional Tax Advisor
Preparing your own taxes can save you money, but if you’re in doubt, have questions about recent changes, or just need to talk through legal IRS tax jargon, hiring a tax professional is a good idea; better yet, you could avail yourself IRS programs such as Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) which provide free tax prep from an IRS-trained volunteer for qualified applicants.  Visit VITA/TCE Locator Tool for more information and VITA or TCE sites near you.
 
 
 
Why does your withholding matter?
 While there is no “wrong” amount to withhold, what you do claim can make a difference in improving your financial health—especially during tough economic times like many of us are experiencing right now. Withholding less and increasing your current take-home pay could go a long way to giving you the slack you need to pay expenses, handle unexpected expenses or avoid going deeper into debt.
 
Simply put, withholding matters, and your W-4 makes a huge difference today and tomorrow. Live in the present. Build for the future. You got this.

 


 

 

* Credit Human does not claim or intend to provide professional tax or legal advice. This content has been prepared for informational purposes only and does not substitute professional advice. Please consult with a professional tax or legal advisor for more information.







  Share with a friend:
  1. Facebook
  2. Twitter
  3. Article

Make an Appointment

with a Financial Health Specialist. We'll help you get started on a spending plan.