Curious about the total amount of taxes withheld from your income? Tax Withholding Estimator for the 2023 tax season and tax year can help you out with figuring it out.
- Overview of why we withhold tax.
- Under-withholding penalty.
- Filling out a new Form W4.
Tax Withholding Estimator works simple. When you get to use it, you should complete it in about five to ten minutes—depending on your tax return. You will start by providing the tool with basic information about your tax return, income, and withholding.
If you want more accurate results, you can enter the anticipated adjustments, deductions, and credits. This will allow you to see your tax liability as well as tax refund clearly. In a way, you can treat the Tax Withholding Estimator as a calculator to see both your tax liability and refund.
Why taxes are withheld from my income?
Employers are required by federal law to withhold income tax(es) from their employees’ income. This is how employees pay their federal income tax for the majority of the portion. The taxes withheld from an employee’s income is important. If the taxes withheld is much less than the tax liability, it will result in owing to the IRS which any taxpayer should avoid.
As an employee, the rate of withholding should be enough to pay off your total tax liability for that tax year. If you underpay taxes, you may be subject to an under-withholding penalty.
What’s under-withholding penalty and how to avoid it?
The Internal Revenue Service requires workers to pay their federal income taxes through withholding. A portion of your income is taken and forwarded to the IRS. If the total amount of taxes withheld during the course of the tax year is less than 90% of your tax liability, you will have to pay an under-withholding penalty.
Generally, the under-withholding penalty is about 3.39% of the underpayment but if you pay taxes early, the penalty will be reduced. So, it’s best to pay taxes early if you withheld less than 90% of your tax liability.
If you owe $10,000 in taxes and you withheld $8,000 in total, that’s a $1,000 underpayment. You will pay $1,040 or a similar amount in under-withholding penalties.
As for how to avoid paying an under-withholding penalty, you can estimate the taxes withheld. Because most taxpayers don’t know how much tax is withheld from their income until they get their Form W2 which shows the total amount of federal income tax withheld, figuring out the taxes withheld prior to receiving it is difficult.
Fill Out a New Form W4
If the taxes withheld from your income doesn’t quite meet your tax liability, you should fill out a new Form W4—Employee’s Withholding Certificate. The estimator should give you how much tax you need to withhold in addition to get a tax refund.
A good way to start is to divide this number by the remaining pay frequency. For example, if you’ve completed the estimator at the start of July and you’re getting paid bi-weekly, you have 12 more paychecks ahead of you before the tax year ends.
If you need to withhold $4,000 more to get a tax refund, your employer needs to withhold at least $333. As the last step to get there, subtract the current rate of withholding from the needed withholding, and the result is how much you need to withhold in extra to meet your tax liability.
When to file a new Form W4?
As long as the information entered on your W4 is correct, you shouldn’t have any problems with under-withholding or over-withholding. However, when a certain life change affects your federal income tax return, you should file a new Form W4 to avoid mishaps.
Note: You can see how the new Form W4 will affect your withholding before giving it to your employer by entering the new data on Tax Withholding Estimator.
Life changes where you should file a new Form W4 include:
- Getting married or divorced
- Having or adopt a child
- Losing a job
- Taking on a second job
- Buying a home
- Starting a new job
Most of the reasons for your spouse if filing a joint return. For example, if you’re filing a joint return and you or your spouse; have a child, lose a job, take on a second job, buy a home, or even start a side gig, you should file a new Form W4 informing these to your employer.
Once you file a new Form W4, the new rate of withholding will begin the next pay period. So, if you file a Form W4 three days before you get your paycheck, the new rate of withholding will begin the paycheck after that.
After filling out a new Form W4, you can then enter the new information on Tax Withholding Estimator to see if it’s enough to pay off tax you owe in 2023.