How Much Should I Withhold From My Paycheck for Taxes?

Tax season typically has two outcomes: a refund, which is fun, or owing money, which is not.

While getting a tax refund is nice, it really means you’ve had too much of your income withheld from your paycheck throughout the year. Essentially, it’s money you overpaid to the government, which is why you get it back. Similarly, if you owe money after doing your taxes, it means that too little has been taken out of your paychecks. The ideal outcome here is to come as close to $0 without actually owing anything extra, and a lot of that depends on how much money is withheld from your paychecks.

Learn More: What To Do If You Owe Back Taxes to the IRS

How Much Should I Withhold for Taxes?

The ideal amount to withhold from your paycheck depends on your filing status, income and how many dependents you have. But there is a simple formula you can apply that helps determine the exact amount that you should have withheld from your check.

Here’s a look at how to apply that formula to your situation, and hopefully make tax season a little less hectic in the future.

Total Your Tax Withholdings

First, take a look at a recent paystub and find out how much was withheld. Multiply that amount by the number of paychecks you get per year. So if you had $100 withheld and are paid at the end of every month, multiply 12 X 100 for a total of $1,200.

If you’re married and filing jointly, you’ll want to make the same calculation for your spouse’s income. Once you have the two totals, simply add them together. This is the amount you’ll want to be withheld. Keep in mind this only applies to federal income tax, and the rates will vary depending on which state you reside in.

Estimate Your Tax Liability

Once you know your estimated withholdings, the next step is to figure out what you’ll owe in taxes this year. The IRS has worksheets, which you can access here, for this, which is really a lot like doing your taxes before actually doing your taxes — but think of it as being extra prepared. That and it’s an important step when it comes to making sure you’re not withholding too much (or too little) from every paycheck.

Obviously, the specifics will again vary based on individual incomes. For example, if a couple has a combined taxable income of $100,000 and they file a joint return, that would mean they’d end up owing about $12,600 in federal taxes. The goal at this point is to make sure what they each have withheld from their respective paychecks is as close to that $12,600 figure as possible.

Adjust Your Withholding

Assuming you’re withholding too much, or too little, from your income, you’ll want to readjust your paycheck accordingly. Fill out and submit an updated W-4 to your employer. If you’ve been at your current job for a while, it might not be a bad idea to update your W-4 anyway.

Is It Smart To Withhold More Taxes From a Paycheck?

W-4 forms have the option to allow for additional amounts to be withheld, and that can work to your advantage. If, for example, you have a second job that could put you in a higher IRS tax bracket, extra withholding might keep you from owing tax at tax time.

Extra withholding can be especially beneficial if your second job is a side gig where you work as a freelancer or independent contract. In that case, you won’t have tax withheld from that extra pay.

The rule of thumb is to set aside 25%-30% of your earnings. It’s a significant amount, which is due to the fact that under tax law, you’re considered both the employer and the employee. The self-employment tax is 15.3%, and you’ll also pay state and federal income taxes. Besides, having more than you need when the taxes are due is a far better alternative than not having enough.

You can also pay freelance income taxes quarterly, which the IRS requires if you typically owe $1,000 or more. If you owe less than that, then the taxes can simply be paid when you file your annual tax return. As always, the IRS also has information and forms available online to help navigate this process.

In the event your withholding covers your tax liability, there’s no benefit to withholding extra money from your pay. A better strategy is to put that money in a high-yield savings account. That way, you can access it if you need to, and you’ll earn some interest on your savings.

FAQ

Federal tax withholding is just one consideration to keep in mind when you're preparing your tax return or planning for next year. Here are some other topics you might be wondering about:

• What is the FICA tax rate?

  • The FICA tax rate is 15.3% of your gross wages. The tax is divided between Medicare at 1.45% and Social Security, which receives 6.2%. If you're a W-2 employee, your employer pays half.

• What is the capital gains tax rate?

  • Short-term capital gains are taxed at your federal income tax rate. Long-term capital gains tax rates vary from 0% to 20%, depending on your income.

• Is it better to itemize or take the standard deduction on my tax return?

  • You'll have to calculate your deductions both ways to see which is the most beneficial. Here are the 2023 tax write-offs for people who take the standard deduction:

    • $13,850 for single and individual filers

    • $27,700 for married joint filers

    • $20,800 for heads of household

• How long does it take to get a tax refund?

  • Most taxpayers receive their refunds within 21 days, according to the IRS, but how long it takes to get your refund depends on whether you request a check or direct deposit. If your return requires additional review, it will also take longer.

Daria Uhlig contributed to the reporting for this article.

Information is accurate as of March 12, 2024. 

This article originally appeared on GOBankingRates.com: How Much Should I Withhold From My Paycheck for Taxes?