Why Employees Should Check Their Federal Withholding Every Year

Learn why the IRS encourages employees to complete their W-4 correctly so that the right amount of federal income tax is withheld.

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The Internal Revenue Service (IRS) says employees should check their federal withholding every year. However, employees aren’t always aware of this recommendation, which is why employers should inform them about it.

What is federal withholding?

Federal withholding refers to the federal payroll taxes that you’re required to withhold from your employees’ taxable wages. These taxes consist of:

  1. Federal income tax
  2. Social Security tax
  3. Medicare tax

Employees do not need to review their Social Security and Medicare tax withholdings each year because these 2 withholding amounts are based on fixed, universal percentages that are established by the federal government. You simply withhold these 2 taxes (at the mandated percentages) from employees’ taxable wages. However, federal income tax withholding is another story.

How federal income tax withholding works

Employers must require each new hire to fill out an IRS Form W-4. The employee includes their federal income tax withholding conditions on the W-4, including their filing status and any dependents.

The W-4 helps you determine how much federal income tax to withhold from the employee’s wages each pay period. Ultimately, you must withhold federal income tax according to the employee’s Form W-4 and the IRS tax withholding table that matches the employee’s situation. (Note that payroll software eliminates manual tax withholding calculations.)

Why employees should check their federal withholding every year

The entries that employees make on their Form W-4 are driven by their personal or financial circumstances — such as being the head of the household, getting married or divorced, gaining a second job, or having a baby.

If an employee incorrectly fills out their W-4, they could end up underpaying federal income tax and owing taxes when they file their return with the IRS. Or, they could end up overpaying federal income tax, which qualifies them for a refund. The IRS discourages both of these outcomes — stating that underpaying may cause the employee to receive a tax bill or penalty, and overpaying could deprive the employee of much-needed funds (until they get a refund).

Underpaying may cause the employee to receive a tax bill or penalty, and overpaying could deprive the employee of much-needed funds (until they get a refund).

Instead, the IRS encourages employees to complete their W-4 correctly so that the right amount of federal income tax is withheld. Employees can accomplish this by reviewing their federal income tax withholding every year and completing a new Form W-4 to reflect any changes.

Which employees should check their federal withholding?

According to the IRS, “All taxpayers should review their federal withholding each year to make sure they’re not having too little or too much tax withheld.”

This means all of your employees should be checking their federal income tax withholding every year. This includes employees who:

  • Have a working spouse
  • Have 2 or more jobs at the same time
  • Work only for a portion of the year
  • Claim tax credits (e.g., the child tax credit)
  • Have dependents age 17 or older
  • Itemized deductions on previous tax returns
  • Are high earners and have more complicated tax returns
  • Received large tax bills or large tax refunds for the prior tax year

When should employees check their federal withholding?

They should check it:

  • At the beginning of the year
  • Whenever the federal income tax law changes
  • Whenever they undergo a personal or financial change that impacts the entries on their Form W-4 — these changes are called “life changes”

What are some life changes that could impact Form W-4?

Life changes include:

  • Marriage
  • Divorce
  • Birth of adoption of a child
  • Buying a home
  • Retirement
  • Filing for bankruptcy
  • The employee or their spouse starts a new job, or starts or stops working a second job
  • The employee’s spouse stops working altogether
  • Tax credits or itemized deductions (e.g., dependent care expenses, child tax credit, charitable donations, medical expenses, education credit, earned income credit)
  • The employee has taxable income that is not subject to tax withholding (e.g., self-employment income, dividends, interest income, capital gains, IRA distributions)
  • Income adjustments (e.g., alimony expense, IRA deduction)

How can employees check their federal withholding?

Employees may use the IRS Tax Withholding Estimator to conduct a “paycheck checkup,” which can help them figure out whether to give you a new W-4.

For assistance with the Tax Withholding Estimator, employees may view the IRS’ step-by-step tutorial video and Tax Withholding Estimator FAQs. Employees with more complex tax situations should refer to IRS Publication 505, Tax Withholding and Estimated Tax.

Before using the Tax Withholding Estimator, employees should gather the following information:

  • Their most recent pay stubs
  • Their spouse’s most recent pay stubs, if married
  • Any other sources of income they have outside of their employer
  • Their most recent federal income tax return

The results of the Tax Withholding Estimator depend on the accuracy of the inputted data. For this reason, employees should strive for total accuracy when entering the requested information. They should also use the results from the estimator when completing a new Form W-4.

Employees may use the IRS Tax Withholding Estimator to conduct a “paycheck checkup,” which can help them figure out whether to give you a new W-4.

Note that the Tax Withholding Estimator does not request sensitive information — such as name, address, Social Security number, or banking information. Also, the IRS says that it does not save or record the information entered in the estimator.

Let employees know how to submit a new Form W-4

Whether you require employees to submit Form W-4 in person, electronically, or through a self-service portal, let them know the procedures for updating the form.

Employees may need to check their state or local tax withholdings

If the state or local government says you must withhold state or local taxes from your employees’ wages, then your employees may need to review the withholding every year. This is especially true if the state or local tax withholding system is similar to the federal government’s. In such cases, employees typically must complete a state or local tax withholding form (comparable to Form W-4) when they are first hired and when they experience certain life changes.

Some states and localities have flat tax withholding rates, rather than tax withholding tables. For example, employers in Pennsylvania must withhold state income tax at 3.07% of taxable wages. Because this is a fixed rate that generally applies to all employees in Pennsylvania, there’s no need for these employees to fill out a state tax withholding form or submit an updated form.

Employees in Arizona, however, must use Form A-4 to elect the percentage of state income tax that they want withheld. If they would like to change their elected percentage, they must give their employer a new Form A-4.

The state or local revenue agency may have its own withholding calculator that employees can use to ensure the right amount of state or local taxes are withheld.

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