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Note from APA OKC: This is a great article to help you and your fellow employees keep more money in your pocket each year or not have to break the bank on April 15th. Being a payroll pro means knowing the answers, and this article will give you plenty of info!
When your federal tax return is completed, you will most likely discover that you’ll either receive a tax refund or owe money. If either of these amounts is substantial, it’s probably time for you to review your withholding election. If you owe a large amount of tax, you may need to increase the amount of taxes withheld from each paycheck you receive. If you discover that you’ll receive a large refund, you may elect to reduce the amount of taxes withheld from your paychecks.
In both cases, the ultimate goal is to get as close to a zero balance as possible when it comes time to prepare your federal tax return. If you find that you owed a large amount of tax, adjusting your Form W-4, Employee’s Withholding Allowance Certificate, for additional withholdings will mean a little less take-home pay in each paycheck, but should eliminate the federal taxes due when you prepare your return in upcoming years.
Conversely, if you received a large refund, a reduction in the amount you have withheld will mean a little more take-home pay in each paycheck to help with day-to-day living expenses (and less of a refund owed to you when you prepare your return in the future).
Examples of events that can have a significant impact on your tax liability and may require an adjustment to your withholding or the number of exemptions you claim on your Form W-4 include:
a change in your marital status,
a birth or death of a dependent, or
Regardless of your reasons for choosing to review or change your withholding, the IRS provides an interactive online tool to help you make the most informed decision. The IRS Withholding Calculator can help you decide what elections you should make on the Form W-4 that you provide to your employer. You’ll need to know your current income, withholding, dependents, and marital status to use the tool.