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Using The IRS Withholding Estimator

7 minute read
February 6, 2020

Some taxpayers in filing in 2019 for their 2018 taxes found out their refunds or amount owed was different than planned. This was primarily due to an adjustment in the withholding taxes as a result of the 2017 Tax Cuts and Jobs Act. The IRS tables just resulted in less tax being withheld for 2018 as compared to 2017. This most likely resulted in slightly higher paychecks, but less of a refund at the end of the year, or in some cases, a tax bill to pay.

The IRS created an income tax calculator for taxpayers to use to help with determining the correct amount of tax to be withheld, and this is the perfect time of year to give this tool a try. So why might you want to check your withholding?

  1. Checking your withholding can help protect against having too little tax withheld and facing a tax bill or penalty at tax time next year.
  2. You may prefer to have less tax withheld up front, so you receive more in your paychecks and get a smaller refund at tax time.

Whatever your reason for checking the withholding, you can minimize the amount of the withholding adjustment if you start earlier in the year. This is because you have more paychecks to spread the additional withholding throughout the year.  

You will need to have pay stubs for all employers on hand to complete the jobs section. You need to have a good idea of the amount of income from other types of income (interest, dividends, Social Security, self-employment income, etc). A copy of your prior year tax return is helpful for estimates and to make certain you do not miss something.

Using the Tax Withholding Estimator

The first steps deal with your federal filing status (single, married filing jointly, married filing separately, Head of Household, or qualifying widower). You will notice a question mark (?) by most items in the estimator. You can click the question mark to get an explanation of what is being asked. This early part also inquires about dependents you have or if you can be claimed as a dependent by another person.

The next question asks if you have a job or pension from which taxes are being withheld. If you answer "no" to both of these, then your session is complete. You must have a job or pension subject to withholding for the estimator to continue. The system will let you account for up to four jobs.

The next section will appear on your screen as Step 5 of 5 - Other Sources of Income and Tax Payments. This is the value in the estimator. You will be asked if you have any of the following types of income:

  1. Receive Social Security benefits this year.
  2. Receive a scholarship or grant that must be counted as income.
  3. You will collect unemployment compensation.
  4. Earn net income from self-employment.
  5. Receive unearned income such as dividends, interest, annuities, alimony, or a distribution from an IRA (not Roth IRAs), 401(k) or a trust.
  6. Had withholding or made estimated payments for income such as dividends, interest, distributions from an IRA (not Roth IRAs), 401(k) or a trust, or other form of specialized income.
  7. Have earned income from other sources.

If you are the type that likes to either get a small refund or owe just a little then this part 5 of 5 is really important for you. The estimator will come back and ask you about any of the above you want to consider in your estimate. So, if you have a job and own a part-time business, you can account for the income from your business in your federal income tax withholding instructions to your employer on the Form W-4. So, check all the above that apply to consider in your estimate.

Details of Job Earnings and Other Income Sources

This next section allows you to begin entering the details of your income source beginning with your job income. For this part you will need to have a recent pay stub. You will be asked how frequently you are paid (weekly, semi-monthly, etc) and the date of your most recent paycheck period ending date. You will then enter the salary you expect to receive for the year and any bonus you expect or have been paid for the year. Next, you will enter the total federal income tax withholding for the year to date. Then, you will provide the amount taken out from your last check (look for FIT or FITW on the deduction section of your pay stub.

The next section needed from your check stub deals with tax deferred retirement and HSA plans or FSA plans (Cafeteria plans). Just enter the amounts you expect to enter for the year. So, for example, if your salary is 45000, and you contribute 3% to your 401k plan, then enter $1,350 for the amount you expect to contribute for the year. For the HSA/FSA, enter the amount you elected to contribute for the year.

Other Sources of Income and Tax Payment

This section allows you to enter the other income items you noted above from step 5 of 5 at the beginning of the estimator. For any box you checked in step 5 of 5, you will be able to enter the estimated amount of income you expect from the noted income source. Entering this information will provide you with your expected total tax liability for all these income sources along with your salary income, and you can adjust your federal income tax withholding to account for the tax due on this income that is not otherwise subject to federal income tax withholding.

If you make estimated income tax payments using Form 1040-ES or online estimated tax payments, you can enter the amount you expect to pay at the bottom of the page.

Adjustments to Income

The estimator allows you to also consider adjustments to gross income. You will be asked to enter amounts as applicable for the following adjustments to gross income:

  1. Self-employed health insurance deduction
  2. Contributions to self-employed SEP, SIMPLE, or other qualified plans
  3. Student loan interest deduction
  4. Educator Expense Deduction
  5. Deduction for contributions to an IRA outside of deductions included in payroll deductions
  6. Health Savings Account Deduction (outside of those entered in payroll deductions)
  7. Moving Expenses for Members of the Armed Services
  8. Alimony paid
  9. Penalty for Early Withdrawal of Savings
  10. Certain business credits for reservists, performing artists, and fee-based government officials

When entering these amounts, just make certain you do not items 2, 5, and 6 as you may have entered this under the job section. Generally, only include items noted above if they are not connected with your employment.

Itemized or Standard Deduction

The estimator will consider the greater of your itemized deductions or you standard deduction. If you choose to consider itemized deductions, you will need to estimate the following amounts for the tax year:

  1. Taxes you paid (not federal income tax)
  2. Deductible interest expense (e.g., mortgage interest)
  3. Health care expenses
  4. Charitable contributions
  5. Casualty losses
  6. Other deductions

Tax Credits

The tax credits section allows you to consider various credits to which you might be entitled for the tax year. The child-related credits are fairly detailed in the calculator; however, some of the other credits (retirement credits, education credits, general business credits) require you to compute the amount of the credit you anticipate. So, these might be tough for some to compute. We recommend you make certain to  consider the child related credits as these will apply to most families.

The Results Page

The results page provides your total expected tax withholding, expected tax liability, and your anticipated refund or balance due. It looks something like this:

Your Results

Based on the information you entered

If you do not change your withholding, you may owe taxes at the end of the year.

Expected tax withholding$7,692*

Anticipated tax obligation$8,839**

Estimated under payment$1,147

The expected tax withholding includes federal income tax withholding and any estimated tax payments you made. The expected tax liability includes federal income tax, additional Medicare tax, and self-employment tax (if applicable).

The underpayment of $1,147 indicates a need for additional federal income withholding if you want to pay less at tax time or receive a possible refund. If you want to try and bring this amount to zero, you will need to adjust your withholding amount using Form W-4.

Adjusting Form W-4

Adjusting the Form W-4 needs to be done carefully. Let me explain. This post is being published in February 2020, and many reading this are using a 2019 or earlier Form W-4. The Form W-4 has been completely redesigned for 2020. This calculator (estimator) can be used to correctly fill out the 2020 or later Form W-4, but you will need to check your next paycheck to make certain your withholding is going to be on track.

Let's assume you adjust your Form W-4 every year, and you provided your employer  a 2020 Form W-4. The simplest fix to increase your withholding is to provide a new 2020 Form W-4 to your employer with an additional amount to be withheld from each check noted on line 4c of the 2020 Form W-4.

The additional amount of withholding should be computed based on the number of expected pay periods remaining in the year. So, my example notes an underpayment of $1,147. If there are 15 remaining paydays in the year, the amount on line 4c should be $77 (rounded) (1147 / 15). If you entered everything correct in the estimator, the results will show the amount of additional withholding needed to break even or even to compute a refund amount (use the slider bar).

If you have an earlier Form W-4 on file (pre-2020) then you will need to discuss with your payroll department completing the new Form W-4 and possibly ask them to estimate what your withholding will be under the new Form W-4 and then make your adjustment to line 4c based on the expected tax liability noted above.

Here are some links that may help:

https://apps.irs.gov/app/tax-withholding-estimator/about-you

https://www.irs.gov/pub/irs-pdf/fw4.pdf

Photo by Kelly Sikkema on Unsplash