Tax withholding is the money that employers are legally required to take out of their employee’s paychecks. Instead of that money going into your pocket, it’s automatically put towards your federal income taxes to prevent you from owing the IRS money come tax filing season, as well as Medicare and Social Security.

However, employees can adjust how much they want withheld depending on how they fill out their W4. Depending on filing status, dependents, anticipated tax credits, and deductions, it’s possible to tell your employer not to withhold any taxes at all. (Contract workers, freelancers, and gig workers don’t fill out W4s and therefore don’t have these federal income taxes automatically set aside and are responsible for saving for federal income taxes on their own.)

If too much tax is withheld, you get a tax refund. When too little tax is withheld, you’ll end up owing the federal government money and potentially face other consequences too.

Estimate your owed federal and state taxes based off your taxable income.

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What happens if I did not withhold enough taxes on my W-4?

Julie Farah, a tax attorney at Justice Tax, knows that withholding enough tax can be difficult to deal with come tax season. Why? Because people generally do not consider saving money to use for their taxes.

It is true that you may owe the IRS if you don’t withhold enough taxes through your employer. The amount of tax debt owed will vary depending on your income and the amount withheld. The IRS typically does not waive tax debt that resulted from withholding mistakes.EXPERT: Julie Farah, Tax Attorney for Justice Tax

If you repeatedly under-withhold tax on your checks and accrue tax debt with the IRS, they can send a “lock-in” letter to your employer. This forces you to withhold at the highest tax rate. That takes away all of your flexibility when it comes to paying your current taxes!

What is an IRS lock-in letter?

Form 2802C is a self-correcting letter sent by the IRS notifying you when your tax withholdings don’t comply with guidelines and need to be increased. You get 30 days to update your W-4 or appeal this decision. Your employer then has an additional 30 days to update your withholdings.

Failure to adjust your W-4 withholdings will result in your employer being issued a 2800C “lock-in letter”. This form instructs employers to withhold federal income tax at the maximum rate (single marital status and zero withholding allowances) effective immediately. Additionally, employers must disregard any revised W-4s submitted by the employee that decreases the amount of withholding. Tax withholdings cannot be changed without the IRS’ approval.

You can request to be released from the Withholding Compliance Program after timely tax filing and payment for three consecutive years. Your employer will receive a 2813C letter notifying them that you have been released from the lock-in and you can now submit a new Form W-4.

What happens if I withheld too much?

If too much tax is being withheld from your paycheck, you will end up getting a tax refund. While everybody likes suddenly getting a pile of money, it’s actually not a great thing, in terms of smart financial planning.

Why? Because getting a tax refund means more money was taken out of your paychecks than necessary. That means you missed out on the benefits of having that money immediately available for things like paying off debt sooner (and cheaper) or investing it to earn interest, which would be more financially beneficial in the long run.

The ideal situation is to owe nothing and receive nothing.

When you should change your tax withholding

The first clue that your tax withholding is wrong is the total line on last year’s return. The bigger the number, whether positive or negative, the more likely a change is in order.

But there’s a whole slew of situations that could have changed your tax liability since then, including:

  • You were unemployed or self-employed for part of the year
  • You had multiple jobs
  • Your working spouse changed jobs
  • You got married or divorced
  • You had a baby
  • Your son or daughter started filing their own taxes
  • You had income from outside your job, such as interest, dividends, alimony, or unemployment benefits

Basically, you should revisit your W-4 — the form that specifies your tax withholding — after any major change in your life.

How to change your payroll tax withholding

You can file a new W-4 with your employer at any time, usually through your HR department. Like nearly everything tax, the W-4 form can be tricky to complete correctly! You will also need to coordinate with your spouse if you are married, as not to overclaim household exemptions.

To complete Form W-4 successfully, think in terms of your tax return and not in terms of real life. For example, consider your filing status and not just your marital status. If you and your spouse file jointly, select “Married” on your W-4. If you file separately, select “Married, but withhold at a higher Single rate.” Choosing the wrong marital status will get you off to a bad start from the beginning. Also keep in mind that if you aren’t going to claim someone on your tax return as a dependent, don’t figure them into your W-4 either!

Another good tip is to take advantage of all possible tax exemptions on your W-4 for your main job. That’s the job that pays the most money to you. If you have multiple jobs, your secondary, lower paying jobs’ W-4s should be completed with 0 exemptions and taxed at the highest tax rate. This will prevent any unexpected tax bills come filing time!

The IRS has a withholding calculator to help you find the right balance. This tool is an excellent resource to use while completing your W-4. To get the most accurate results, you’ll want to have recent pay stubs and your last tax return on hand.

What if I’m a freelancer?

When you are employed by someone else, they are responsible for following your preferences for tax withholding. If you’re a freelancer or self-employed, however, you have to take care of your taxes on your own. If you don’t set aside enough money for taxes from your freelance income, it’s like you didn’t withhold enough on your W-4 and you can accrue tax debt.

The amount you need to set aside for taxes depends on how much you make. If you work full-time but also have a side gig, don’t assume that your W-4 will cover the taxes for both. Review how freelance taxes work to ensure you aren’t missing anything important.

Check your withholding now before the end of the year!

If your 2018 tax return didn’t turn out the way you had hoped, experts at say that now is the perfect time to check your payroll tax withholding if you haven’t done so already since the new tax reform laws took effect last year. This is especially crucial if you owed more or less than you thought you would, experienced a big life change like a marriage or a child, or made any changes to your withholding last year. To find out if you need to speak with your employer about altering your tax withholding, use the Withholding Calculator from the IRS.

There is still time before the end of the year to make adjustments if you see that you’re going to owe something when you file next year.

If you increase your payroll tax withholding now, you can make up the difference, so you won’t have tax debt next April.

Don’t leave your taxes to chance! Let connect you with the right professionals so you can avoid a bill next year to Uncle Sam!

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Article last modified on May 24, 2023. Published by, LLC

Reviewed By

Jacob Dayan

Expert contributor, Community Tax CEO & Co-Founder