The way you fill out the W-4 form that you turn in to your employer when you start a new job determines how much income tax you will have withheld from each paycheck, which affects how much you will ultimately owe or receive as a refund in April. What you may not know is that it's possible to submit a new W-4 form to your employer whenever you want – it's not a one-time thing. (For more on income taxes, see our new Tax Center.)
If you don't want to owe anything in April, but you also don't want to overpay taxes and give an interest-free loan to Uncle Sam all year, read on to find out how to get your tax bill or refund closer to zero before tax time approaches.
Note that the personal exemption will disappear, starting with tax year 2018, under the new GOP tax bill. But it still operates for your 2017 taxes according to the number of withholding allowances you claimed on your W-4 form.
Determine Your Total Tax Liability
Your personal situation will determine how accurately you can calculate your total tax liability for the year. If you are a salaried employee with a steady job, it's relatively easy, because you can predict what your total income for the year will be. If you're an hourly, seasonal or self-employed worker, make an educated guess based on your earnings history in your current line of work and how your year has gone so far. (For more information, read 3 Common Tax Questions Answered.)
You have three options for calculating your tax liability:
- Online Paycheck Calculator
Online paycheck calculators can be found easily with a simple internet search. By entering your gross annual pay, the state where you work, your pay frequency, federal filing status and the number of withholding allowances you entered on your W-4, the calculator will tell you your federal tax liability per paycheck, which you can multiply by the number of pay periods to find out your total tax liability for the year. This method is easy and the result will be reasonably accurate, but it may not be perfect since your actual tax liability will depend on whether you itemize your deductions and which tax credits you claim.
- IRS Tax Withholding Calculator
The tax withholding calculator at the Internal Revenue Service website is particularly useful for people with more complex tax situations. It will ask about factors like your eligibility for child and dependent care tax credits, how much you have contributed to a tax-deferred retirement plan or health savings account (HSA) and how much federal tax you had withheld from your last paycheck. Based on the answers to your questions, it will tell you how much federal tax it expects you to owe at the end of the year, what you have paid so far and how much you will owe or be refunded. (To read more about these credits, see Give Your Taxes Some Credit.)
- Sample Tax Return
If you have tax software or know how to fill out a 1040 form yourself, you can complete a sample tax return. This method will give you the most accurate picture of your end-of-year tax liability. The only thing that can make it inaccurate is if you have to use the previous year’s tax software because the current year’s software hasn’t been released yet. However, a little online research can usually uncover which tax provisions have changed from the previous year, such as the new standard deduction amount. (Note that the standard deduction will nearly double, starting in 2018: from $6,350 in 2017 for singles to $12,000; $9,350 to $18,000 for heads of household; and $12,700 to $24,000 for married filing jointly.) Filling out a sample return is also ideal for people who itemize deductions, such as homeowners or those who are self-employed. (Mastering these fundamentals now will take the stress out of tax season. Read more in Next Season, File Taxes on Your Own.)
Determine Your Tax Withholding
Once you know the total amount you will owe in federal taxes, you'll need to figure out how much you need to have withheld per pay period to get to that total, but not exceed it, by December 31.
- If not enough tax is being withheld, the easiest way to fix the problem is to fill out a new W-4. On line 6, which says "additional amount, if any, you want withheld from each paycheck," fill out the difference between what you should be paying each pay period and what you're actually paying. You could also decrease the number of withholding allowances you claim, but the results won't be quite as accurate. And you don't have to wait for your employer's HR department to hand you a new W-4 form – just print it out yourself from the IRS' website. (For more ways to fill out your W-4 for deductions, read Payroll Deductions Pay Off.)
- If you've overpaying and you want to get some of that extra money back each pay period, try increasing the number of withholding allowances you claim. It won't match the worksheet, but that doesn't matter. You can claim seven allowances even if the W-4 worksheet suggests you should only claim two.
- The most important thing is to pay enough tax throughout the year to avoid penalties and interest. You’re required to pay at least 90% of your current year’s tax liability or 100% of your previous year’s tax liability, whichever is smaller. You’ll also avoid penalties if you owe less than $1,000 on your annual tax return.
If it’s so early in the year that you haven't received any paychecks or pay stubs yet, just divide your total tax liability for the year by the number of paychecks you receive. Then, compare that amount to the amount that is withheld from your first paycheck of the year and make any necessary adjustments.
If it's not the beginning of the year, you'll need to compensate for all the previous pay periods when you were over- or underpaying your federal tax by filling out a new W-4 to adjust your withholding up or down for the rest of the year. Then, the following January, you'll need to fill out a new W-4 again, or else your withholding will be off for the new year. (Finding out that you owe money when you were expecting a refund is a nasty shock. If this has happened to you, learn how to bounce back in Top 9 Solutions to an Unexpected Tax Bill.)
The basic way to resolve the under- or overpayment problem is the same, but instead of dividing the amount you'll owe for the whole year by the number of paychecks you receive, you'll need to figure out how much you've paid in federal taxes so far (your pay stub may have a running total; if not, ask your HR department). Subtract that amount from what you owe, then divide the result by the number of pay periods remaining for the year. The final number is how much federal tax you need to have withheld from each paycheck. If you've been underpaying, a simple subtraction calculation will show you how much extra you need to pay each month.
Figuring out the reverse is trickier. There is no simple way to do it; the best method is to plug different numbers of withholding allowances into a paycheck calculator until it spits out the amount closest to the calculated federal tax you want to be paying each pay period.
Remember, if you're self-employed, have fluctuating income because you're an hourly or seasonal worker, have multiple jobs or itemize your deductions, things get considerably more complicated. You probably won't be able to make sure you owe nothing on your taxes with 100% accuracy, because your income and tax liability will change throughout the year. But following these steps may help you get closer to a reasonable number. You can always redo the calculations described above two or three times a year as your income picture evolves. (For more on how itemized deductions can impact your taxes, read An Overview of Itemized Deductions.)
The Bottom Line
It sometimes takes considerable effort to figure out what amount you should really have withheld from each paycheck, especially if it's not the beginning of the year. However, a couple of hours now can either increase your monthly cash flow for the rest of the year or save you from an unexpected bill at tax time.
(Read about why having money now is more valuable than having the same money in the future in Understanding the Time Value of Money.)