How to Adjust Tax Withholding

by Terry Masters

Many people wrongly believe they have no control over the amount of payroll taxes that are taken out of their paychecks every month. The average person fills out their payroll forms when they are hired and never think about the choices made on those forms again. Generally, people bemoan the amount of taxes taken out of every paycheck and feel grateful for the tax refund they receive when they file taxes at the beginning of the year. But employees have a significant degree of control over the amount of payroll taxes and other withholdings that are taken out of their paychecks. The IRS Form W-4 enables an employee to adjust the amount of money withheld at any time by changing the number of allowances claimed. The federal tax code requires you to pay income taxes, but that doesn't mean you have to overpay your taxes and essentially give the government an interest-free loan.

1. Request IRS Form W-4, Employee's Withholding Allowance Certificate, from your employer's payroll department. Alternatively, download a copy of the form from the forms section of the IRS website. You will likely recognize the W-4. It is one of the documents that your employer should have asked you to fill out as part of your paperwork when you were hired. Your employer keeps a W-4 on file for you, and a newly submitted W-4 form supersedes the form that is currently on file. If your employer uses an electronic payroll system, it is likely that you can log in and download a blank W-4 from the forms section of the system at your convenience.

2. Check the current number of allowances you are claiming. An allowance represents an amount of income that you feel will be shielded from tax liability when you file your federal income taxes for the current year. You claim allowances based on the number of personal exemptions you plan to take on your federal income tax return and the amount of itemized deductions, credits and losses that will decrease your taxable income. For example, Form W-4 will instruct you to take one allowance for yourself, if you plan to claim your personal tax exemption on your tax return. It will instruct you to take an additional allowance for each dependent you plan to claim on your taxes and an allowance for your spouse if you plan to file jointly. Call your payroll department to verify the number of allowances that are currently in effect for you. If your company has an electronic payroll system, you may be able to log in and check your current allowances by looking in the personal information section. It is important to know the number of allowances that has resulted in your current level of payroll tax withholding. That way you will know whether you need to increase or decrease your allowances to achieve your desired level of withholding.

3. Determine whether you want to withhold more or less money from your paychecks and the number of allowances that will allow you to achieve your goal. Form W-4 does not do a good job explaining how to determine the number of allowances you should take. The form's instructions provide several worksheets that the average person ignores. To understand how to adjust your withholdings, you must first understand that you can claim any number of allowances from zero to infinity, as long as the number of allowances you claim accurately reflects what you expect your deductions from taxable income to be at the end of the year. If you claim zero allowances, you will pay the maximum amount of taxes for your income bracket. Some people will claim zero allowances on the W-4 as a forced savings plan, knowing it will result in a large lump sum refund. The majority of people merely add up their personal exemptions, counting themselves, their spouse, and their dependents, and use the total as the number of allowances claimed. This typically results in an ordinary refund because most people will have additional tax deductions and credits beyond their personal exemptions that will lower their tax liability. You can also take additional allowances for things that you expect will lower your taxable income, such as business losses from a side business, tax credits and adopting a child mid-year.

4. Complete the certificate section of Form W-4. The certificate establishes your identity and the number of allowances you want to claim. Changing the number of allowances on this form adjusts your tax withholdings. It is practically impossible to know exactly what your tax bill will be for the year, but if you consider how big your tax refund was last year, you can try to estimate the number of allowances to claim. Several websites have calculators to help you determine the number of allowances you should take under various scenarios. But keep in mind that you don't want to take a number of allowances that will result in you owing taxes when you file your return. While there is no law that necessarily requires you to pay your taxes in advance, an underpayment can result in the IRS requiring you to make additional quarterly income tax payments. If you claim more than 10 allowances, your employer is required to report you to the IRS.

5. Give the updated Form W-4 to your employer's payroll department. If your employer uses an electronic payroll system or a payroll service, you may be able to complete a W-4 online by logging into your account. Your employer is required by law to process your allowances adjustment expeditiously.

6. Ask your payroll department for specific forms to change voluntary withholdings. Some employers allow employees to set up voluntary withholdings from their paychecks. Voluntary withholdings include health care benefit plans, gym memberships, holiday savings clubs, charitable contributions, union deductions and anything else that represents a voluntary deduction from your take home pay. Each type of voluntary withholding has its own rules concerning how and when you can make changes. Generally, you can cancel a voluntary payroll deduction at any time, but you may be limited in the ways you can change the deduction.

About the Author

Terry Masters has been writing for law firms, corporations and nonprofit organizations since 1995. Her online articles specialize in legal, business and finance topics. Masters holds a Juris Doctor from Howard University and a Bachelor of Science in business administration with a minor in finance from the University of Southern California.

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