Understanding W-4 tax withholding and when to change it

Determining your tax withholding as a U.S. taxpayer isn’t the easiest task. But if you landed a new job or had a major life milestone this tax season (a new baby, marriage, or  employer), it’s a smart idea to revisit the federal tax withholding on your Form W-4.

Because the withholding amount on your personal income tax is directly related to your refund — or what you may owe at tax time — it’s worth the time to understand what it’s all about. 

What is tax withholding? 

First, let’s answer “What are withholdings?” If you’re stumped about the tax withheld  meaning, you’re not alone. You may have encountered the term federal withholding  when starting a job.

It’s at that time your employer will send you multiple tax forms to  complete. One of the forms in the stack of paperwork will be a W-4 tax form. 

W-4 withholding is the amount of federal income tax held back from your paycheck. When  you submit an Internal Revenue Service Form W-4 to your employer, your employer uses the information to withhold the correct federal income tax from your pay. 

The amount of federal income tax withheld will be different from person to person. The  withholding amount depends on two factors: The amount you earn, and the information you include on your W-4. 

The information you enter on your W-4 can include: Your filing status; the number of jobs you (and your spouse if filing a joint return) hold; how much you earn at each job; how much your spouse earns, if filing a joint return; additional income from other sources and any federal tax withholding; credits and deductions you claim; whether you plan to claim the standard vs itemized deductions; and if you have child or dependent-care expenses and plan on claiming the Child  and Dependent Care Credit for the costs. 

If it’s been several years since you’ve completed a W-4, you may remember trying to figure out your withholding allowances. Once you start to look at a recent W-4, you’ll see that  withholding allowances and allowances on taxes aren’t even mentioned on the form. 

What gives? Well, in 2020, the IRS launched a new form that did away with the method of withholding allowances. In fact, concepts and questions such as dependency allowances and number of exemptions and “how many allowances should I claim?” have all gone by the wayside. 

When this was the tax law, if you didn’t file a W-4, your employer accounted for tax  withholding from your wages at the highest rate — as though you’re single with zero  allowances on taxes. 

How to change your tax withholding 

When you complete the form, there are three main elements that impact how much tax will be withheld from your pay — and will ultimately factor into your tax return: 

1. Accounting for all jobs in your household. If you have more than one job or are  married, you’ll need to consider all your income — and if some jobs bring in more  money than others. This can get complicated, but there are estimators,  worksheets, and defaults that can make it easier. 

2. Claiming children and dependents. Essentially, this is accounting for potential  credits that you may be able to claim. 

3. Making any other tax adjustments. This could be for any side income or  additional income (ex. investments) that you have, extra withholding, or  deductions that you want to account for. 

Some people are exempt from tax withholding. If you didn’t have any federal tax liability last year and don’t expect to this year, you might qualify for an exemption from withholding. 

—H&R Block