The IRS says, “All taxpayers should review their federal withholding each year to make sure they’re not having too little or too much tax withheld.” However, employees may not be aware of the IRS’ suggestion, which is why employers should tell them about it.
Why employees should review their withholding
If they have too little federal income tax withheld, employees may end up owing taxes or being hit with a penalty at tax time. Conversely, if they have too much tax withheld, their paychecks will be smaller — which might hurt them financially, as they must wait until tax time to get a refund.
Employees should submit a new Form W-4 if necessary
All new hires must complete a Form W-4, which helps determine how much federal income tax to withhold from their wages. The employee’s Form W-4 information is driven by a person’s personal and financial situation. If an employee experiences certain life changes during the year, they may need to give you a new Form W-4.
Employees should review their withholding every year if they:
- Have a spouse who works as an employee.
- Have two or more jobs simultaneously.
- Work partially during the year.
- Have dependents who are at least 17 years old.
- Claim tax credits such as the child tax credit.
- Itemized deductions on prior year tax returns.
- Earn high incomes.
- Have complex tax returns.
- Had large refunds or large tax bills for the previous year.
Employees may need to update their W-4 if they experience life changes, such as:
- Divorce or legal separation.
- Adoption of a child.
- Home purchase.
- Starting a new job or stopping a second job.
- Their spouse gaining or losing a job.
- Adjustments to income, such as student loan income deduction.
- Gain of tax credits or itemized deductions, such as medical expenses, donations to charity, education credit and child tax credit.
- Gain of dividends, self-employment income, IRA distributions, capital gains, interest income, and other taxable income not subject to withholding.
Although year-end may be a convenient time to review filing and withholding statuses, taxpayers can submit a new Form W-4 anytime. Often, they will see a need to do so after preparing their tax returns each year. Depending on where your employees work, they may also need to review their state and/or local tax withholdings every year.
Direct your employees to the IRS Tax Withholding Estimator
The Tax Withholding Estimator helps employees ensure the correct amount of federal income tax is withheld from their paychecks. Employees can review the Tax Withholding Estimator FAQs if they have questions about using the estimator. Also, they can consult their tax advisers.