The W-2 is a reporting of your earned wages, including any federal and state taxes withheld as well as contributions to Social Security and Medicare that were deducted from your paycheck. As an employee, you should receive a Form W-2 from your employer at the end of the year. If your personal, financial or living situation changes over the year, you can change the amounts withheld, using Form W-4. Changes to a W-4 take place immediately, so that they will be reflected on your W-2 at the end of the year. Note that employers are not obligated to request updates or changes to your withholdings, so it is your responsibility to make any adjustments as needed.
Making Adjustments to your W-4
Decrease the chances of owing extra tax by making timely changes to your W-4. As a general rule of thumb, if you owe Uncle Sam at tax time, you're more than likely having too little withheld from your paycheck. When you decrease the number of personal withholdings you claim, the IRS will in turn withhold more of your paycheck for tax obligations. When you need to make adjustments to your current withholdings, either fill out a paper Form W-4, or complete it online at irs.gov.
On the other hand, increasing withholdings lets you take home more per paycheck rather than allowing the IRS to have free use of your money until you receive a refund. You can put this money to use yourself by depositing it into an interest-bearing account or investing in a certificate of deposit. Keep in mind that while increasing the amount of withholdings lets you take more pay home, you will also be responsible for coming up with more of your tax bill since fewer taxes will have been withheld.
Another way to adjust your withholdings is to have a specific amount withheld from every paycheck to cover tax obligations. To determine how much to withhold, take the amount of taxes you owe and divide it by the number of remaining pay periods in the current tax year. This will let you know the amount you would need to have withheld from every paycheck so you do not end up owing at tax time.
When Should I Change My Withholdings?
Any time your personal or financial situation changes, it is a good idea to look at adjusting your W-4. When you buy or sell a home, get married or divorced, have another child, or if you start making contributions to your savings, you should review your withholdings. All of these situations impact how you are taxed and affect whether you owe the IRS, break even, or receive a refund.
For example, if you were married and got divorced, you will have to change your filing status. A change of filing status like this can put you in a different tax bracket or qualify you for certain tax credits such as the Earned Income Tax Credit. In addition, if you find yourself paying alimony, then you are able to claim these payments as a deduction on your tax return, so you would need to adjust your W-4.
Consulting with a financial adviser or tax professional can provide further guidance. Also, the IRS’s website has worksheets, forms and an interactive tax withholding calculator that can help taxpayers determine if they need to make any adjustments to their current withholdings.