Did you get an unpleasant surprise this tax season? If you had an unexpected tax bill or a smaller refund than anticipated, you might want to review your paycheck withholdings.
The IRS collects taxes throughout the year through paycheck withholding for W-2 employees or quarterly estimated tax payments from self-employed workers. If you overpaid, you’ll typically receive a tax refund. If you underpaid, you’ll get a tax bill.
When an employee starts a new job, the employer has them fill out a Form W-4. This form tells the employer how much tax to withhold from each paycheck. If you experienced a life change such as a new child, a marriage or a home purchase, you may need to update this form.
Sheneya Wilson, a certified public accountant and founder of Fola Financial in New York, explained to CNBC that one way to do this is to use the IRS paycheck withholding estimator. This is a free tool to estimate the federal income tax you want your employer to withhold from each paycheck.
The IRS says you can use this tool to:
- Estimate federal income tax withholding
- See how your refund, take-home pay or tax due are affected by your withholding amount
- Choose an estimated withholding amount
Wilson tells her clients to check withholdings “at least at mid-year”– and more often for those expecting bigger payments, CNBC reported. However, Wilson warns that the wrong information can do more harm than good. You’ll need your and your spouse’s most recent paystub, your most recent tax return and the amount of any other income you make, including investments or side gigs.
The IRS says that if your tax situation is complex (alternative minimum tax, long-term capital gains or qualified dividends), you may want to skip this tool and reach out to a professional instead.
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