When should I adjust my W-4 withholdings?

Key takeaways

• A W-4 form determines how much federal income tax your employer deducts from your paycheck for taxes.
• Reviewing and adjusting your W-4 at least once a year, and after a major life change, could help you increase your refund and/or decrease your tax bill.
• There are many different life events that can significantly impact how much you’ll owe in taxes and should prompt a change in your withholdings, including marriage, divorce, having or adopting a child, purchasing a home or another major asset, and getting a side hustle or second job.
• The decision to withhold taxes hinges on many different things, including your preferences, goals, and current financial situation.

What is Form W-4?

Form W-4, also called the Employee's Withholding Certificate, is a crucial document to understand for anyone earning a salary or wages in the United States. This form determines how much federal income tax your employer deducts from your paychecks.

Completing a W-4 form accurately is essential when you start a new job, because it affects your take-home pay and how much federal taxes you owe or the amount of your refund. The form asks for details like your filing status, dependents, and any other income or deductions you expect to claim. This information helps your employer match your expected annual income to the amount of tax withheld as closely as possible.

The goal of a W-4 is to balance your withholding so that you won’t owe a significant amount at tax time or receive an overly large refund, which are signs that not enough or that too much of your income is being withheld.

Why should you revisit your W-4 and change your withholdings?

Updating your withholding is a critical part of keeping your financial health in check. As your life changes, so do your tax circumstances. If you fail to adjust your W-4, it can lead to under-withholding, which might result in a tax bill with potential penalties, or over-withholding, which ties up money that you could use, save, or invest throughout the year.

By reviewing your W-4 a couple of times during the tax year, you can make sure that you remain in control over your finances, even when your personal circumstances or federal tax laws change.

It's a good idea to review your withholdings annually or, at the very least, after a significant life event, to ensure that the amount being withheld from your paycheck aligns with your current financial needs and goals. However, you can update your W-4 with your payroll or human resources department any time of the year.

Common life events that trigger changes

There are many different life events that can significantly impact how much you’ll owe in taxes, making it necessary to update your W-4 to reflect your changing circumstances.

Marriage

When you get married, your tax situation can change dramatically. If you and your spouse both earn income, your combined income could place you in a higher tax bracket, affecting how much tax you should have withheld. Update your W-4 to reflect your married status and to account for the joint income to prevent under-withholding.

Divorce

Getting a divorce can alter your tax obligations by changing your income levels and eliminating any tax benefits you previously shared with your ex-spouse. After a divorce, it’s important to adjust your W-4 to reflect your filing status as single, as well as to accurately represent your sole income. This ensures that the correct tax amount is withheld moving forward.

Birth of a child or adoption

Adding a child to your family, whether through birth or adoption, qualifies you for additional tax benefits, such as dependents deductions or child tax credits. These benefits can significantly reduce how much you owe in taxes. Adjusting your W-4 to account for an additional dependent will help to decrease the amount of tax withheld from your paycheck. This means you’ll have more money throughout the year to care for your child.

Purchase of a home

There are many potential deductions you can take when you purchase and/or own a home, including mortgage interest and property tax deductions. These deductions can significantly decrease your taxable income. Reevaluate your W-4 withholdings to ensure they align with the decrease in your taxable income.

Income from a side hustle

Earning additional income from a side hustle means that you'll have more income to report and potentially higher taxes to pay. To avoid owing additional taxes when you file your return, it's smart to adjust your W-4 at your primary job to withhold more to cover the taxes due on your side income.

Getting a second job

Taking a second job increases your total income and, therefore, the amount of taxes you owe. This often means you’ll need to take additional withholdings. Adjust your W-4 forms at both jobs to reflect the total amount of income you earn. This ensures that the correct total tax amount is withheld and prevents any surprises when you file your taxes.

Should you withhold more or less taxes?

How much to withhold from your paychecks in taxes depends on many different things, including your preferences and current financial situation. If you like having the security of receiving a tax refund, you might opt to withhold more taxes. This approach gives you a built-in savings plan; however, it means you’ll have less in your paycheck throughout the year.

On the other hand, if you want to get the most out of every paycheck for your immediate use, adjust your withholdings to closely match the amount of taxes you owe. This can prevent overpaying throughout the year. If you go this route, you’ll get a smaller refund (or no refund at all).  On the plus side, you’ll enjoy bigger paychecks without having to worry about a large tax bill when you file.

How to adjust your W-4 withholdings

Need to adjust your W-4 withholdings? Here’s a step-by-step guide on how to get it done.

1. Start by reviewing your most recent pay stub to understand your current withholdings.
2. Use the IRS Tax Withholding Estimator, which is an online tool that provides tailored recommendations, based on your unique financial situation.
3. Request your W-4 from your employer.
4. Complete the W-4 with updated information that reflects any changes in your financial or personal life. Be thorough and accurate to ensure proper withholdings.
5. Submit the newly completed W-4 to your employer's HR or payroll department.

Keeping your W-4 form up to date is crucial for ensuring your tax withholdings match your current life circumstances, helping you avoid financial surprises and optimize your monthly earnings.

Get guidance to ensure you're on the right track by working with a Jackson Hewitt Tax Pro. They can assist you in effectively adjusting your withholdings to meet your needs and financial goals.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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