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How to Calculate your Tax Withholding on your W-4 Form

As we are proceeding through tax-filing season, it is the perfect time to visit the tax withholding form that employees complete. If you are starting a new job, congratulations on the new job and be sure to accurately complete your W4 form so that you do not overpay taxes. If you are in the same job for a while, it may be time to review your W4 and possibly complete a new one.

The goal is 0…. when completing a tax withholding form.

It is a known fact that most employees overpay on taxes, and some receive a refund after filing a tax return. If you receive a tax refund, think about what that extra money in each paycheck could have done for you throughout the year if you had not given the government a free loan. On the flip side, if you owed money, that’s perfectly fine in my book as long as a penalty is not assessed. When completing the W-4 form, the goal is to not overpay, but also not underpay. We are trying to get as close as possible to $0.

In the year 2020, the government rolled out a new tax withholding form and confused all of us; employees, employers, payroll companies. The goal of the new form was to help the tax withholding to be more accurate, so we moved from ones and twos to actual dollar values that means something. 1 kid…. $2,000 and so on.

I know getting a refund feels good, but I am here to tell you that it shouldn’t and if it did then read this article in its entirety, download a new W4 form, accurately complete the form and turn it in to your payroll department immediately. Instead of giving a free loan to the government, maybe consider using that excess money withheld to buy government treasury notes and earn some interest on your money. I mean, after all, you earned it!

If you have a huge tax bill, that is a separate conversation beyond your W4 form.

What is tax Withholding?

A withholding is the portion of money taken from your paycheck by your employer; generally speaking; the difference between your net pay and your gross pay. Now, don’t include the benefits like your 401k or HSA, you are paying in your tax expense. Those are separate. Your employer withholds a portion of your pay and then remits to the IRS periodically. The calculation for the amount of tax withheld is impacted by the information on your W4. When you file your taxes, you then find out if you withheld too much or too little.

There are five sections to your W4:

Step 1 requires you to enter your basic information. It is important to get your name and social security number correct, but also pay attention to the option in 1c. The withholding for a single person will be different from that of someone claiming head of household.

In step 2, you document whether you have multiple jobs or spouse that works.

Step 3 helps you to claim dependent tax credits if you have children under 17 years.

Complete step 4 if you want to withhold more or will be itemizing deductions, etc.

Then you sign that the information you provided was honest and accurate.

When to Adjust tax withholding

If you became a homeowner, a parent or a spouse, it is a great time to review and possibly update your tax withholding. This will help you to avoid owing the IRS and having to send them a check when you file your taxes, or it will help you to withhold just the right amount and avoid huge refunds.

Now let’s get into the meat of the matter.

How do you calculate your tax withholding?

The easiest way to go about this is to take your refund check and divide by the number of paychecks you get in a year. There are usually 26 pay periods in a year, so 26 is a good number to use. If there have been no major life changing events in your life, this method will exactly how much you’ve been overpaying by every paycheck. Use that number and adjust your tax withholding.
This is the reactive approach, but it is quick and easy, so it is worth mentioning.

The Proactive approach would be to:

  1. Calculate or estimate your withholding for the year
  2. Estimate your tax liability. You can find out your tax bracket on IRS website. They actually want you to know these things. Just remember, the US tax system is progressive, so it will likely not be the same rate for your entire salary.
  3. Calculate the difference between the estimated withholding for the year and your estimated tax liability.
  4. Adjust your withholding to get as close as possible to $0. The goal is 0!

Here is an example:

Single filer earns $60,000 for the year 2024;

You’ll pay 10% on the first $11,600 ($1,160) then you will get promoted to 12% for the next portion of your salary up to $47,150 12%(47,150-11,600)= ($4,266) and then you get another promotion to the next bracket; 22% for the remainder of your salary ($275).

The estimated Tax Liability for a single filer making $60,000 per year is $5,701.00.

You have the right to change your withholding or submit new W4 as often as you’d like. The payroll processer may not like you or the act, but that’s fine because the goal is 0; not to be liked.
Always consult a professional if you have any concerns or need assistance.

This article carries no official authority, and its contents should not be acted upon without professional advice. For more information about this topic, please contact our office.