Withholding Tax Definition: When and How to Adjust the IRS Withholding Tax?


Taxes paid to the government by the payer of the income (not the recipient of the income) are known as withholding taxes. This is usually done by an employer by deducting a percentage of the income before paying it out to the employee. It is possible to influence the retained amount by filling out the form Form W-4, Withholding tax certificate of the employee, at any time of the year. The goal of adjusting withholding tax is to have exactly the right amount withheld – as close as possible to your actual tax liability. If you withhold excess money, you might get a large tax refund, but if you withhold less money, you can use more of your income for more necessary expenses without having to wait for tax season.

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How the tax deduction works

The IRS requires employers to withhold a portion of each employee’s paycheck for federal taxes throughout the year. Without this built-in pay-as-you-go mechanism, there would be a high probability that much of the American population would not have the funds to pay their tax bill by mid-April or even by mid-October if it were to file late.

Form W-4 is used to ensure that the employer withholds the correct amount of money for federal taxes. If less than the correct amount is withheld, you owe money (and possibly an underpayment penalty) when you file your tax return, and if too much money is withheld, you usually get a refund.

Form W-4 has recently been redesigned to comply with changes in tax law courtesy of the Tax Cuts and Jobs Act of 2017. Currently, the tax deduction is based on your filing status and the standard deduction for the year. If you list deductions, the Form W-4 accounts for this, as well as number of dependents, household income, tax deductions, and tax credits.

Steven Rodriguez, a partner at O’Connor & Rodriguez, PA in Miami Shores, Fla., recommends familiarizing yourself with the IRS. tax withholding estimator to help you get an accurate estimate of your tax liability for the year. “Make sure you have a copy of your most recent tax return handy, as the new Form W-4 asks detailed questions based on your current and future tax returns,” including specific line items, he says.

The IRS website answers some frequently asked questions about their tax deduction estimator as well Form W-4.

You will also need information about your spouse’s income or self-employment income, if applicable, and other sources of income you may have. There is no privacy risk when using the tool as you are not required to provide any personal information such as your name, social security number or bank account numbers and the IRS does not store any information you enter.

When to adjust your tax deduction

There are some circumstances that require an adjustment to your tax deduction, including starting a new job or if you are not happy with the tax deduction from the last tax season. When you start a new job, your employer will ask you to fill out the new Form W-4. If you are happy with your current W-4 with your current employer, you do not need to make any changes to the withholding unless there was an over or under withholding.

If you haven’t changed jobs since the Tax Cuts and Employment Act was passed, you should also update your W-4. Many people with withholding problems didn’t update their W-4s when the law was passed.

It’s also a good time to fill out a new W-4 form if you’re going through major life events. For example:

  • Your registration status changes – if you get married, divorced or widowed.
  • You have or are adopting a child.
  • Your child turns 17 in a given tax year.
  • You buy a house.
  • Your income drops dramatically.
  • They participate in the gig economy or get a second job.
  • Your spouse gets a new job.
  • You are unemployed part of the year.
  • You paid off student loans.
  • You have a significant increase or decrease in your pre-tax retirement benefit through a 401(k) or deferred compensation plan.

How to adjust your tax deduction

If you are single, have only one job, have no maintenance obligations and take the standard deduction, then the new form is easy to use. You just need to fill in the top part (step 1) with your name, address, social security number and enrollment status. Then skip steps 2-4 and provide your signature and date at the bottom of the form (step 5).

If you are married and both you and your spouse are employed and earn about the same amount of money, you may be able to do the same as above plus check the box in step 2(c). Each spouse would need to do this on their respective Form W-4. If one spouse earns significantly more money than the other, the tax deduction may be too high.

If you have multiple sources of income or dependents, things get more complicated.

In step 2, you need to choose one of three ways to account for the different sources of income:

  • Use the The IRS online tool for best results.
  • Complete the multiple job worksheet on page 3 of the form.
  • Use the abbreviation given above for two-income and similar-income households.

Step 3 takes into account tax credits you receive when you claim dependents. Here you can also calculate the education tax credit and the foreign tax credit if you are ready to throw yourself into the weeds of the instructions.

Level 4 takes into account deductions and unearned income, e.g. B. from interest, dividends and social security. A deduction worksheet for step 4(b) on the form factors in itemized deductions, including mortgage interest, charitable donations, medical expenses, and state and local taxes. If you take the standard deduction, you can add deductions such as student loan interest and deductible IRA contributions to the worksheet. However, do not add the actual standard deduction amount to the total as this will result in an error.

If you have another job and do not wish to disclose this fact to your employer, you can use the online tool to calculate your expected tax liability and then enter an “additional withholding amount” in step 4(c). This won’t raise suspicion because as far as your boss is concerned, you might want to do it anyway just to get a bigger tax refund.

If you owed no taxes last year and will not owe taxes this year because you expect to earn less than the standard deduction amount for your filing status, you can simply fill out the top portion of the form and write “exempt.” in the space below line 4(c) and sign and date the form. This exercise must be repeated every year as the exempt status is only valid for one year.

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