When you start a new job, you are usually handed a giant stack of forms to fill out. Buried somewhere in that massive pile of paper is the IRS W-4 form. Your tax withholding is based on how many allowances you claim on the W-4, as well as whether or not you choose to have any extra money withheld. In other words, you want to fill it out correctly otherwise you’ll have either too much or too little money being withheld from your paycheck for income tax.
Most people just fill out the form once when they’re hired and forget all about it. But your circumstances will change over the years and you may need to make adjustments to your W-4. Some employers allow you to that right online while others still require you to sign a hard copy and hand it in to the Human Resources department. If you answer “yes” to any of the three questions below you may want to adjust your tax withholding.
Did You Get Hit With a Hefty Tax Bill?
If you find yourself owing a large amount when you file your taxes, you’re probably not having enough money deducted from your paycheck. The W-4 worksheets are meant to be a guide to how many allowances you should claim but they aren’t a one size fits all solution. You may need to either reduce your allowances or have an additional amount withheld.
Did You Get a Ridiculously Large Refund?
Who wouldn’t like getting a huge tax refund? An unexpected cash windfall is something most of us would love. But this isn’t some handout that the government decided to give you just because they thought you were nice and deserved it. It was already YOUR money…you just loaned it to the government all year long (interest free by the way) and then they paid it back to you. You could have had that extra money in each paycheck and used it for your own purposes throughout the year. Unless you like letting other people borrow your money for free, you should consider reducing the amount of your withholding.
Did You Experience a Life Event?
There are a few other times when you will want to consider adjusting your tax withholding. If you got married, divorced, had a baby, started a new job, got a big promotion, or launched a side business, your tax liability will likely change. If any of these life events occur to you, consider it a good excuse to revisit the W-4 form and examine your tax withholding.