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Updating Your Tax Withholdings

When filing annual taxes, many individuals and families realize their withholdings are incorrect and need to be updated. Knowing when and how to update your tax withholdings is essential for avoiding future tax liability, potential penalties, or accidentally paying more in taxes than you should throughout the year.

What exactly are my tax withholdings?

Whenever you start a new job, your employer has you fill out a W-4 form, which determines the amount of federal taxes your employer is legally required to pay to the IRS on your behalf. This is necessary anytime you begin to earn a new form of income. If the amount withheld turns out to be too high or too low, you’ll either receive a refund when you file your taxes or owe an additional amount.

While this is the typical practice for most people, some may opt to pay estimated taxes, especially those who are self-employed. Form 1040-ES is used to calculate estimated tax, and payments must be made four times throughout the year, either by mail or online.

Why would I need to update my withholdings?

While the idea of a tax refund is exciting, in reality, it’s money you’re missing throughout the year. The primary goal when calculating your withholdings is to not owe any additional taxes or receive any refund after you file. In cases where you have underpaid taxes throughout the year, you could wind up owing a large, unexpected bill or even owe penalties for underpayment. That’s why making sure your withholdings are correctly calculated is so important.

When should I recalculate my tax withholdings?

Typically, your tax withholdings need to be updated anytime you have a major personal life change. This may include:

  • You or your spouse getting a new job or a second job.
  • You or your spouse being unemployed for part of the year.
  • Getting married.
  • Getting divorced.
  • Having or adopting a baby.
  • No longer claiming a child as a dependent.
  • Major life purchases, like your first home, education, or charitable giving.
  • Non-wage income.

Some life events bring about more taxes, while others offer credits or deductions that can lower your tax liability. Either way, you’ll see the results reflected in your paycheck.

Additionally, it’s a good idea to check your tax withholdings at the beginning of each year and whenever major tax laws change. Having a CPA you can rely on ensures you’ll never miss a relevant tax code update.

How do I update my tax withholdings?

When necessary, ask your employer for a new W-4 to fill out and resubmit. For some employers, you may be able to do this electronically. As of 2020, the IRS developed a new system for W-4s. While using the same baseline information, the new sheet asks clearer questions, in hopes of increasing accuracy in withholdings and transparency around the entire process.

Will refiling my W-4 in 2023 affect my 2022 taxes?

No, updating your W-4 in 2023 won’t help or hurt your 2022 taxes. That’s why it’s best to check on your withholdings early in the year. The later you make adjustments, the less impact those adjustments will have on your upcoming taxes.

How can I be sure my tax calculations are correct?

While many sites offer W-4 calculators to help estimate your withholdings, the best step you can take is sitting down with your CPA. Having a professional analyze your personal situation will make sure you’re paying everything you owe, while also reaping the benefits of any applicable credits or deductions. Whether you reviewed your withholdings last month or five years ago, schedule a meeting with SME CPAs today to discuss the best tax strategies for you!

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