How To Use the Withholding Calculator
Step 1: Enter the dollar amount of your most recent tax refund. If you owed money when you filed your taxes, enter a negative value.
Step 2: Select your preferred tax outcome.
Step 3: If you selected that you want to receive a refund, enter the dollar amount you would like to receive
Step 4: Choose how often you receive your paycheck
Step 5: Depending on your situation, the calculator will recommend changes you can make to adjust your tax withholding.
The Nuts & Bolts of Tax Withholdings
Every time you start a new job, you complete Form W-4. It’s a short form. And with just three inputs, it tells your company’s payroll department how much federal income tax to withhold from your paycheck.
Having income tax withheld from your paycheck means you generally don’t have to worry about making regular tax payments to the IRS. Your employer withholds the tax and sends it to the IRS on your behalf. The total amount of tax withheld for the year is shown on Box 2 of your Form W-2, Wage and Tax Statement, that you receive in January.
If you’re like many employees, you have no idea how the amount of tax withheld from your paycheck is calculated. You know something is withheld, but you’re uncertain about how much. Plus, getting the amount correct can be tricky. It’s important to make sure your withholding covers your tax liability for the year so that you don’t owe a lot of money come tax season. But, you also don’t want to overpay during the year and let the IRS hold onto your money interest-free.
We’re here to walk you through the basics in understanding your withholdings. And you can use the tax withholding calculator below to experiment with different scenarios. It’s a quick way to see how adjusting your withholdings can affect your net pay.
What is Form W-4?
Form W-4, Employee’s Withholding Allowance Certificate, is an IRS form that tells your employer how much federal income tax to withhold from your paycheck.
The W-4 requires you to enter information such as your name, address, and social security number. You’ll also check a box identifying your tax filing status, which could be single, married, or married but withhold at the higher single rate. If you plan to file as head of household, you should check the married box.
The form then asks you to calculate the number of withholding allowances you wish to claim. Form W-4 provides a worksheet to help. Generally, you’ll claim a withholding allowance for yourself, your spouse (if applicable), any dependents, and for each job you have.
The more allowances you claim, the less income tax withheld from your check. Claiming five allowances will result in less tax withheld than claiming two allowances.
There is no right or wrong answer in calculating your withholding allowances. You can claim as many or as few allowances as you want. But beware that claiming too many allowances and having too little federal income tax withheld can result in an underpayment penalty when you file your tax return next year.
Note that allowances are not the same as deductions or dependents. Deductions reduce your taxable income on your tax return. Dependents are your children or others you financially support.
Are you exempt from tax withholding?
Few people are exempt from having income tax withheld from their gross pay. If you had zero tax liability last year, and you expect the same this year, then you are exempt. That means you were refunded every penny you had withheld last year, and you expect the same this year.
When to complete Form W-4?
When you start a new job, you should complete a Form W-4. But that’s not the only time.
If you get married or have a child, it’s advantageous to complete a new Form W-4 to reflect your change in tax filing status or the addition of a dependent.
Additionally, if you received a large tax refund, you may want to consider updating your W-4 to have less income tax withheld. Making that adjustment means you’ll receive more money in each paycheck. You can then put that extra money to good use by investing it during the tax year instead of letting it sit with the IRS and not earn any interest.
Conversely, if you had a sizable tax bill, you may need more income tax withheld. Underpayment penalties kick in when you’ve paid less than 90 percent (85 percent for tax year 2018) of your tax liability. The IRS likes receiving its money throughout the year, not just at tax time. Revising your Form W-4 by claiming fewer allowances can do the trick.
You can submit a new Form W-4 whenever your personal or financial situation changes. If you have a TaxAct account, the software can walk you through completing the form and help you determine how many withholdings you should claim.
Be sure to submit the completed form to your payroll department. DO NOT send it to the IRS.
There are other taxes!
Besides federal income tax, Social Security and Medicare taxes are withheld from your pay. All employees are required to pay those taxes.
Both the Social Security and Medicare tax (collectively referred to as FICA taxes) are a fixed percentage of your pay. Social security tax is 6.2 percent of your gross pay, and Medicare tax is 1.45 percent. In 2020, you don’t have to pay Social Security tax on any money above $137,700.
Unfortunately, there is no wage limit for Medicare tax. All wages are subject to it. However, if you earn over $200,000 in 2020, you’re required to contribute an additional 0.9 percent in Medicare tax.
Don’t forget state or local income taxes!
If you live in one of the 43 states that taxes resident’s wages, state tax is withheld from your gross pay too. Your state may use the Form W-4, but it might also have its own form you need to fill out. Check your state’s Department of Revenue for details on how tax is withheld in your state.
If you live in a city, town, or county that taxes its workers, you have to pay those taxes through your withholdings. Ask your company’s payroll department if there is a form you need to complete.