How To Change Your Tax Withholdings If You’re Not Seeing What You Want on Your Paycheck
When you get a new job and agree on a wage or salary to be paid twice per month, that number divided by 24 is not what you receive in your paychecks. That’s because your employer withholds part of your check each pay period to give to the government to satisfy your tax obligations.
See: 9 Bills You Should Never Put on Autopay
Find: 25 Sneaky Car Dealership Tricks To Avoid at All Costs
If they take out too little, you will have underpaid the IRS. In case you’re not familiar, the IRS is not an organization that responds well to being underpaid, and you’ll owe them money when you file your returns. If your employer deducts too much, which is much more common, you’ll get a refund. The latter is certainly the better of the two options, but it requires you to give an involuntary and interest-free loan to the IRS.
That’s why the goal should be to break even, so if you’re not seeing what you like on your paycheck, you’ll have to make some adjustments. Here’s how to do it.
Examine Your Paycheck Stub
Paychecks come with two parts on different sides of a perforated line. There’s the fun part that you cash or deposit, and the boring part with a bunch of numbers on it. Although you can’t turn the boring part into money, it’s pretty important — and so is knowing what all those numbers mean.
Here’s a breakdown of what comes in:
Gross income: What you earned before taxes and other deductions.
Net income: Called take-home pay, this is how much you keep after taxes.
YTD (year to date): This is a summary of your gross and net income, as well as deductions, since the year began.
Learn: What Is the Child Tax Credit and How Does It Really Work?
Here’s a breakdown of what goes out:
Federal tax: This is what your employer deducts to pay your federal income tax. It’s much easier for the IRS to take a chunk out of your paychecks than it would be to chase you around for money that you may or may not have all at once at year’s end. You also notice it less than you would a big bill come tax time.
Federal Insurance Contributions Act (FICA) Social Security: This deduction is you chipping in to finance Social Security.
FICA Medicare: This deduction is used to pay for Medicare — like Social Security, younger earners will pay it on your behalf one day.
State tax: Not all states levy an income tax, but if you live in one that does, this deduction will cover your obligation.
Deductions: You might see other deductions, like insurance premiums or other taxes or program fees taken out here.
Your gross income only changes if you get a raise, but you have a say in everything else on the list.
Do Your Own Calculations
If your withholdings are lopsided one way or the other, the IRS has a tool to help you determine the right figure on your own.
“The IRS offers an online withholding calculator for taxpayers to estimate withholding amounts,” said Dr. Lei Han, associate professor of accounting at Niagara University. “Taxpayers can choose the withholding amount that works better for them.”
It’s called the Tax Withholding Estimator, and you can find it at IRS.gov. You’ll use the results from the estimator tool to complete a new W-4, which is the form you give your employer to change the amount that your company withholds from your check. The IRS recommends you submit a fresh W-4 at the beginning of every year, but if you don’t, you should absolutely revisit your withholdings when big things happen in your life.
“Both changes of income and marital status — as well as many other life events, such as home purchase, birth of a child, etc. — can change the amount of withholding,” said Han. “With an increase of income, the tax liability will likely go up. Newly married couples are required to give a new W-4 to their employers within 10 days. If both of them work, they may move into a higher tax bracket.”
Take the Time To Get It Right
When you’re using the withholding estimator tool and filling out your new W-4, take it as seriously as you would your tax returns — any errors that you input will show up as errors in your paycheck deductions.
“For accurate withholding, you need to use accurate information,” said Kari Brummond, an accountant with TaxCure.com.
Although you won’t include personal data, the withholding estimator requires much of the same information and many of the same documents that you use to do your taxes.
“To use it, you need your filing status, pay stubs from your and your spouse’s jobs, info about self-employment income and investments, and your most recent tax return,” said Brummond. “You can also ask your accountant if they will fill out a W-4 for you. They’ve just done your return and have all your details handy so they should easily be able to fill out this form if your tax situation is the same this year as it was last year.”
More From GOBankingRates
This article originally appeared on GOBankingRates.com: How To Change Your Tax Withholdings If You’re Not Seeing What You Want on Your Paycheck
