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How to Calculate Your Tax Withholdings

A young woman using a calculator is sitting at a table.

5 Minute Read

Think that hefty tax refund you got last year was basically a big bonus? Think again.

A big, fat refund just means you’ve been loaning the government too much of your hard-earned cash with each paycheck, and Uncle Sam is simply returning money that was yours to begin with—that’s why it’s called a refund!

Or maybe you have the opposite problem. Maybe you’re getting hit with massive tax bills and you’re sick and tired of sending the IRS a big check every April. If that’s you, we feel your pain.

If you’re in either boat, it might be time to take a closer look at your tax withholdings.

Tax Withholdings Explained

Tax withholdings are simply the chunk of money your employer sets aside from each paycheck to cover your taxes. Even though tax returns are due in April, you pay your tax bill a little at a time all year long.

Two factors determine how much tax is withheld from your paycheck:

  • How much you earn each pay period
  • The allowances you claim on your W-4 form

The allowances on your W-4 form basically reduce how much your employer deducts from your paycheck for income taxes. The more allowances you claim—for yourself, your spouse and your kids, for example—the less money your employer will withhold for taxes. Withhold too much, and you get a tax refund. Withhold too little, and the IRS sends you a bill.

Don’t let taxes stress you out. A tax pro is the way to go!

Why Do You Need to Adjust Your Tax Withholdings?

Dave recommends adjusting your withholdings so you break even (or get really close to breaking even) at tax time. In other words, you don’t send the IRS a big check, and you don’t get a huge refund back either.

IRS data shows that the average tax refund for the 2019 tax season was $2,725.1 So, let’s say you got paid every two weeks and received the average refund. That means you should’ve had an extra $105 in every paycheck last year! Think of what you could do with $200 or more each month!   

And if you went through a major life change over the past year that might impact how much you owe in taxes—you got married, bought a house, or welcomed a baby into the world—it’s a good idea to take a fresh look at your tax withholdings and make any adjustments.

How to Calculate and Adjust Your Tax Withholdings

Finding out how much you need to withhold from each paycheck can take some of the mystery and stress out of tax season—and it’s not that hard to figure out! Ready to get your tax withholdings back on track? Here’s how.

Step 1: Total Up Your Tax Withholdings

Let’s start by adding up your expected tax withholdings for the year. You can find the amount of federal income tax withheld on your paycheck stub. Let’s say you have $150 withheld each pay period and get paid twice a month. That would be $3,600 in taxes withheld each year.

If you’re single, this is pretty easy. If you’re married filing jointly and both of you work, calculate your spouse’s tax withholdings too. In this example, we’ll assume your spouse has $400 withheld each pay period and receives a monthly paycheck.

Then add the two together to get your total household tax withholdings.

Step 2: Estimate Your Tax Liability

Now that you know your projected withholdings, the next step is to estimate how much you’ll owe in taxes for this year.

The IRS provides worksheets and a tax withholding calculator to walk you through the process, which is basically like completing a pretend tax return.

If you’re married and filing jointly, for example, and your taxable income is around $81,300 for the 2019 tax year, that puts you in the 22% tax bracket. So, your tax liability, or what you owe in taxes, is about $9,600.

Remember, federal taxes aren’t automatically deducted from self-employment income. If you have a side business or do freelance work, it’s especially important to factor that income into your tax equation.

Step 3: Subtract the Difference

Once you have an idea of how much you owe the IRS, it’s time to compare that amount to your total withholdings. Take your annual tax withholdings and subtract your estimated tax liability.

Let’s continue our example from above and assume your estimated tax liability is $9,600. In that case, you’d have a potential $1,200 deficit.

A positive balance indicates a refund, while a negative balance means you owe more and may have to pay the IRS interest and a penalty at tax time. The good news is you can fix it before tax time ever rolls around!

Step 4: Adjust Your Withholdings

If you run the numbers and find you’ve got ground to make up, it’s best to adjust your tax withholdings as quickly as you can. The longer you wait, the harder it will be to get it just right. You have two options:

  • Reduce personal allowances. One way to increase your withholdings is to reduce the number of allowances you claim on your W-4. Fewer allowances means more tax will be withheld—though it’s by no means an exact science.
  • Specify additional withholdings. If you don’t want to mess with your allowances, your other option is to enter an additional amount you want to have withheld with each paycheck. Simply divide your estimated tax shortage by the number of pay periods you have left before the end of the year to get your number.

Work With a Pro

If you get stuck along the way or don’t feel comfortable with your numbers, ask a tax advisor for help. They can make sense of your personal tax situation and guide you toward a reasonable target. With a few minor adjustments, you can strike a better balance and look toward next year’s tax season with a lot less stress.

Find your tax pro today!

Tax Pro or File Your Own?

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Tax Pro or File Your Own?

Use this free quiz to help you decide which tax filing method is right for you.
Take the Quiz

Tax Pro or File Your Own?

Use this free quiz to help you decide which tax filing method is right for you.
Take the Quiz