It’s that time of year when Uncle Sam comes knocking on your door for your part of the tax pie. If you fail to pay your fair share of taxes throughout the year, you could end up with an IRS underpayment penalty. If you underestimate how much your tax withholding should be, you could end up owing the IRS in April and scrambling to pay your taxes.

Tax withholding can be confusing. So, if you’re struggling to figure out how withholdings impact your paycheck or end-of-the-year tax filing, you’ve come to right place. And if you happen to owe the IRS, know that all hope is not lost and there are actually a few ways you can avoid accruing tax debt.

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

When too little tax is withheld, you end up owing the federal government money. This sucks for the obvious reasons: It’s another bill, and one you probably didn’t expect. 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!

If you find yourself owing more in taxes than you can afford to pay back, you do have options. It is always a good idea to seek professional help anytime you feel in over your head or if you just want to make sure you end up with the best possible outcome to an already bad situation.

Julie Farah, a tax attorney at Justice Tax, reiterates that not withholding enough tax can be difficult to deal with come tax season. Why? Because people generally do not save with the goal of paying taxes somewhere down the line.

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

The ideal situation is to owe nothing or get a tiny refund, and you do that by changing your tax withholding. That way, you can take control of your funds and make the best decisions for you and your household on how to spend it. But first, you need to know when to do that.

If you would like to consult with a tax debt professional for free, let Debt.com connect you with the right expert for your needs.

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What happens if I withheld too much?

If too much tax is being withheld from your paycheck, you end up getting a refund. While everybody likes suddenly getting a pile of money, this is actually a bad thing.

It means you’ve been giving Uncle Sam an interest-free loan, rather than getting that extra money in every paycheck where it could help on a day-to-day basis. It could be used to pay off debt sooner and cheaper, or invested to earn interest. Investing extra money in a tax-deferred savings plan such as an IRA can also help reduce your overall tax bill on your annual tax return!

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 Debt.com 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 Debt.com 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 November 16, 2022. Published by Debt.com, LLC

Reviewed By

Jacob Dayan

Expert contributor, Community Tax CEO & Co-Founder