Do yourself a favor: Look at your last paycheck and see how much federal income tax has been withheld from your wages so far this year. If you’ve had too much or too little withheld, there’s still time to adjust your tax withholding for the rest of the year (and beyond). But, since you probably only have a couple of pay periods left this year, you need to act as soon as possible to have an impact on your overall 2021 withholding.
Making a change can put more money in your pocket now…or shield you from an IRS penalty later. The goal is to have your annual tax withholding be as close to your overall tax liability for the year. Think like Goldilocks – you want your tax withholding to be “just right.”
If you have too much tax withheld during the year, your take-home pay isn’t as high as it could be and you’re effectively giving Uncle Sam an interest-free loan each pay period (you won’t get paid back until you get your next tax refund). Reducing your tax withholding in this case will immediately boost your paycheck (it’s like giving yourself a raise). And, yes, next year’s tax refund will be smaller…but that just means you’re not letting the government hold on to and use your money for a few months (again, without paying interest).
On the other hand, if your employer doesn’t withhold at least (1) 90% of the income tax you expect to owe for 2021, or (2) 100% of the tax you paid for 2020 (110% if your 2020 adjusted gross income was more than $150,000), you could be hit with an underpayment penalty when you file your federal tax return next April. Increasing your tax withholding now can help reduce or completely avoid this penalty. It can also lower or prevent a tax bill when you file your federal tax return next year.
File a New W-4 Form to Change Your Tax Withholding
There are many reasons why your tax withholding could be a bit off. Common causes include a marriage, divorce, birth of a child, or home purchase during the year. If it looks like your 2021 tax withholding is going to be too high or too low because of one of these or some other reason, you can submit a new Form W-4 now to increase or decrease your withholding for the rest of the year. Give the new form to your employer and they’ll take it from there (check with your HR department to find out exactly who you should send the form to). Your employer must implement any change by the start of the first payroll period ending on or after the 30th day after you submit a new W-4 form …….