All of us know that employers generally withhold income tax from their employees’ paychecks and pay the tax to the IRS on their employees’ behalf. In January of each year, employers then provide a W-2 Wage and Tax Statement with the wages paid and the amounts withheld for taxes that employees use for preparation of their annual income tax returns. It is this time of the year that many employees are surprised at the additional amounts they may owe in taxes. To avoid any surprises at tax time, employees should periodically check their withholding.
How is your withholding determined?
Employers calculate withholding tax by referring to an employee’s Form W-4 and the IRS’s income tax withholding table to determine how much federal income taxes should be withheld from an employee’s salary or wages. Here at Erigo Employer Solutions, we have a cloud-based HRIS system which accurately pulls withholding information directly from employees’ W-4 forms. In addition, we provide an annual employee reminder to verify their withholdings are still appropriate. Employees specify a filing status on Form W-4 (single, married filing jointly, married filing separately, head of household and/or qualifying widow), and they may complete other parts of the form if they anticipate additional income, deductions beyond the standard deduction or tax credits.
What to look for when checking your withholding
If, in preparing your annual income tax return, you find that your tax refund is larger or smaller than expected, or that you owe additional taxes, then you should check your income tax withholding elections. For employees who find that they owe more in taxes than anticipated, increasing their withholding in the current year will help to avoid paying taxes when filing a tax return the following year. Employees should also check their withholding when a major life event occurs or when their income changes.
In fact, the IRS recommends checking your withholding in the following instances,
- At the beginning of each year to ensure withholding is correct for the tax year ahead.
- Changes in tax laws that affect a taxpayer’s situation.
- Any lifestyle or financial change like marriage, divorce, birth, adoption of a child, home purchase, retirement or a filed chapter 11 bankruptcy.
- Change in a taxpayer’s wage income, such as the loss of wages for the taxpayer/spouse or additional wages for a taxpayer/spouse due to a second job.
- If the taxpayer has additional income not subject to withholding such as interest, dividends, capital gains, self-employment and gig economy income, and IRA distributions.
- When a taxpayer is reviewing planned deductions or eligible tax credits like medical expenses, taxes, interest expense, gifts to charity, dependent care expenses, education credit, Child Tax Credit or Earned Income Tax Credit.
Employees can use the Tax Withholding Estimator Tool to help fill out the W-4 Form and adjust their income tax withholding. Employees who want to change their W-4 should complete a new Form W-4 and submit it to their employer. Although year end may be a convenient time to review filing and withholding statuses, employees can submit a new Form W-4 anytime. Many employees can change their W-4 electronically via their employee portals or simply submit a physical copy of the new Form W-4 to their employer. Of course, employees who have questions regarding their withholding, or who have complex tax situations, may need to consult their accountant or financial advisor for assistance.