There are many different reasons to adjust your paycheck withholdings, such as getting married, having a child or getting a new job.
When considering whether you should adjust the number of exemptions you claim on your W-4, which will, in turn, adjust your paycheck withholdings, remember that each individual tax situation varies.
Learn when adjusting your withholdings is the right move for you.
Starting a Second Job
Let's say you take on a second job or side gig to earn some extra money this year. This is an excellent time to adjust your withholdings. That's because a second job will likely increase your income, which will then increase the amount you'll owe in taxes. To offset this, you can increase your exemptions.
Generally, if you are single you should continue to claim one on your W-4. This number ensures that they withhold enough so that you do not owe at the end of the year. But keep in mind that this can vary depending on your individual situation.
If your spouse is working, then calculate your exemptions based on your combined income, especially if your spouse makes significantly more than you. You should also double check your withholdings when you get a raise.
You Owed Taxes Last Year
There is nothing as disappointing as having to fork out money to the IRS at the beginning of the year. This also likely means you did not claim the correct amount of exemptions to begin with since the average tax return last year was $2,700.
So if you find yourself with a hefty bill come April, it may be time to adjust your withholdings. If you're still not sure how many exemptions you should claim or the correct amount of withholdings you should claim consider using the IRS Paycheck Checkup tool.
You can adjust your withholdings so that the correct amount is withheld. You can even request that extra money be withheld each pay period. This will save you the hassle of coming up with extra money at the end of the year to pay to the IRS.
You Received a Big Refund
If you received a large refund last year, you should also adjust your withholdings and claim fewer exemptions, since this means you had too much in taxes withheld from your earnings.
Many people mistakenly look at the refund as an easy way to save money. But you are essentially loaning the money to the government and not receiving any interest on it every year if you overpay on your taxes.
Instead, have your extra funds automatically transferred to a savings account, a CD, or even a high-yield savings account. That way, you aren't spending the money, but you're earning interest on it.
You may also qualify for tax breaks such as the Earned Income Tax Credit or other credits and deductions, so be sure to take into account when determining how much you should have withheld.
Any Major Life Event
Any time that you have a major life event, such as getting married, having a baby, or getting divorced, you should adjust your withholdings. That's because these events will likely affect the number of withholdings you claim. Generally, you'll claim more if you get married or have a baby, less if you get divorced.
As soon as you realize a major life event is going to take place, you can make the adjustments, as long as the event is going to happen in the same tax year.
If you have a major life event, you can change your withholdings at any time and aren't restricted by the usual withholding rules.
How to Adjust Your Withholding
If you need to adjust your withholding, you will need to contact your human resource department and fill out a new W-4. You may need to adjust your state withholding, too.
Some companies allow you to make the adjustments online, but smaller companies may have you fill out the form in person. Although you can follow the suggested guidelines on the form, you may want to double-check your work with the IRS Tax Withholding Calculator or talk to your accountant.
How to Determine the Correct Withholding
The calculator will have you enter your income, tax withholdings, and other information. The calculator will then tell you how much you need to have withheld. This tool can take the stress of estimating out.
Additionally, you can go back through the year to make sure you are still on track. Generally, it is a good idea to check when you file your taxes and again in August or September or anytime you experience a major life or work event.
Updated by Rachel Morgan Cautero.