Tax Withholding Changes Can Boost Your Paycheck Now and Avoid Penalties Later (2023)

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 change 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 2022 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).

(Video) Form W-4 Adjust Your Federal Tax Withholding

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On the other hand, if your employer doesn't withhold at least (1) 90% of the income tax you expect to owe for 2022, or (2) 100% of the tax you paid for 2021 (110% if your 2021 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.

(Video) IRS Form W 4 Bigger Paycheck and Lower Taxes

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 2022 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 (opens in new tab) 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 for this year.

Although there are five "steps" on the W-4 form, only Step 1 (name, address, Social Security number and filing status) and Step 5 (sign and date) are required for everyone. You only have to complete Steps 2 to 4 if they apply to you (e.g., you have more than one job, a spouse that works, dependents or other adjustments). Completing all relevant steps will bring your tax withholding closer to your tax liability, which (again) is the goal.

(Video) How To Set Your W4 Tax Form to Get a Refund or Break-Even

If you just want to increase your withholding, one easy way to do this is to specify an extra amount you'd like to have withheld from your paycheck on Line 4(c) of the W-4 form.

IRS's Withholding Tax Calculator

To help you determine if and/or how much to adjust your 2022 withholding, use the IRS's Tax Withholding Estimator (opens in new tab) as soon as you can. Have your most recent pay stub and a copy of your 2021 tax return handy to help estimate your 2022 income. Again, you must act quickly, since we're almost to the end of the year.

We also recommend using the tax withholding calculator early in 2023 to see if additional adjustments are beneficial going forward. In fact, it's a good idea to check your withholding every year. And the earlier in the year you do it – and make any necessary changes – the better. That way your tax withholding will be more even and accurate throughout the year.

But remember that you aren't required to submit a new W-4 form to your employer unless you're starting a new job. If your company doesn't receive a new form from you, it will just continue to withhold taxes based on the most recent W-4 it has on file for you.

Tax Changes and Key Amounts for the 2022 Tax Year

(Video) Can I file exempt on the IRS Form W4? | Tax Withholding Exempt Qualifications


How will changing my withholding affect my paycheck? ›

Will Changing Withholding Affect My Paycheck? Yes, changing your tax withholding will change your take-home pay, though your gross pay will not change. Increasing your tax withholding with reduce your net paycheck amount, while decreasing your withholding increases the amount you take home.

What happens when you increase your withholdings? ›

Extra Withholding Can Increase Your Tax Refund

Simply add an additional amount on Line 4(c) for "extra withholding." That will increase your income tax withholding, reduce the amount of your paycheck and either jack up your refund or reduce any amount of tax you owe when you file your tax return.

Is it better to increase tax withholding? ›

When you have too much money withheld from your paychecks, you end up giving Uncle Sam an interest-free loan (and getting a tax refund). On the other hand, having too little withheld from your paychecks could mean an unexpected tax bill or even a penalty for underpayment.

What is the penalty for not withholding enough taxes? ›

Typically, underpayment penalties are 5% of the underpaid amount, and they're capped at 25%. Underpaid taxes also accrue interest at a rate that the IRS sets annually.

What does withholding tax do to your paycheck? ›

State withholding is money that is withheld and sent to the State of California to pay California income taxes. It pays for state programs such as education, health and welfare, public safety, and the court justice system. California's elected representatives also meet every year to decide how this money will be spent.

How many withholdings should I claim? ›

You can claim anywhere between 0 and 3 allowances on the W4 IRS form, depending on what you're eligible for. Generally, the more allowances you claim, the less tax will be withheld from each paycheck. The fewer allowances claimed, the larger withholding amount, which may result in a refund.

How do I know if my withholding is enough? ›

Use the IRS Withholding Estimator to estimate your income tax and compare it with your current withholding. You'll need your most recent pay stubs and income tax return. The results from the calculator can help you figure out if you need to fill out a new Form W-4 (PDF, Download Adobe Reader) for your employer.

What is withholding tax example? ›

Example of a Tax Withholding

Suppose you earn $2,000 per pay period. Instead of receiving $2,000, you receive a paycheck for $1,600, because your employer has set aside $400 as a tax withholding. For the year, you pay $10,400 in withheld taxes.

How many times can you change your withholdings? ›

“How many times can an employee change their W-4?” is a common question. Actually, there is no minimum or maximum number of times. However, an employer has up to 30 days to implement the change.

Should I decrease my tax withholding? ›

When Should I Decrease My Withholding? If you regularly receive a large tax refund, you might consider decreasing your withholding amount. This way you'll get more money in your regular paycheck instead of at tax time.

When should I use withholding tax? ›

Withholding tax is when a business withholds a portion of a payment for services or goods to a supplier and remits that portion to the government on behalf of its supplier. This is a tax compliance method utilized by governments to ensure that taxes are remitted properly by a business and on a timely basis.

What does it mean to have withholding tax? ›

For employees, withholding is the amount of federal income tax withheld from your paycheck. The amount of income tax your employer withholds from your regular pay depends on two things: The amount you earn. The information you give your employer on Form W–4.

Is there a penalty for too much withholding? ›

Is There a Penalty for Overwithholding Taxes? No, the IRS will not charge you a penalty if you pay more tax than was necessary. You will need to file a tax return to request a refund of the money you overpaid.

How can I avoid estimated tax penalty? ›

Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

How much is a tax penalty? ›

If you owe tax and don't file on time, there's also a penalty for not filing on time. The failure-to-file penalty is usually five percent of the tax owed for each month, or part of a month that your return is late, up to a maximum of 25%.

Can you claim 2 If you are single? ›

There's also the option of requesting 2 allowances if you are single and have one job. That allows you to get close to your break-even amount. However, you need to be cautious as this could result in some tax due. If you have more than one job and are single, you can claim 2 at the first job and 0 at the second job.

Is it better to claim 1 or 0 if single? ›

By placing a “0” on line 5, you are indicating that you want the most amount of tax taken out of your pay each pay period. If you wish to claim 1 for yourself instead, then less tax is taken out of your pay each pay period.

Do you make more money claiming 1 or 0? ›

Claiming 1 on your tax return reduces withholdings with each paycheck, which means you make more money on a week-to-week basis. When you claim 0 allowances, the IRS withholds more money each paycheck but you get a larger tax return.

Who determines how much you withhold from your paycheck? ›

Your employer will use information you provided on your new Form W-4 as well as the amount of your taxable income and how frequently you are paid in order to determine how much federal income tax withholding (FITW) to withhold from each paycheck.

How much can you make without withholding taxes? ›

Not everyone is required to file or pay taxes. Depending on your age, filing status, and dependents, for the 2022 tax year, the gross income threshold for filing taxes is between $12,550 and $28,500. If you have self-employment income, you're required to report your income and file taxes if you make $400 or more.

What are the three types of withholding taxes? ›

Social Security Tax / Medicare Tax and Self-Employment. Federal Unemployment Tax.

What are the two types of withholding tax? ›

There are two basic kinds of withholding tax: creditable and final.

Who is withholding tax paid to? ›


It is a payment on account of the ultimate income tax liability of the taxpayer or company. Withholding tax (WHT) is not a separate tax on its own and does not confer an exemption from the filing of annual tax returns by any company which had suffered WHT deductions.

How long does it take for W 4 changes to take effect? ›

If you receive a revised Form W-4 from an employee, you must put it into effect no later than the start of the first payroll period ending on or after the 30th day from the date you received the revised Form W-4.

Can withholding tax be refunded? ›

So as it stands now, the law does not provide a specific period within which an administrative claim should be acted upon. The rule remains that the refund for income taxes due to excessive withholding should be filed within two years, both administratively and judicially.

Is it better to claim 1 or 0 on your taxes? ›

By placing a “0” on line 5, you are indicating that you want the most amount of tax taken out of your pay each pay period. If you wish to claim 1 for yourself instead, then less tax is taken out of your pay each pay period.

Can I change my tax withholding for one paycheck? ›

If you'd rather have a bigger paycheck and a smaller refund, you can control this. All you have to do is submit a new Form W-4 to your employer to adjust your federal income tax withholding.

Can an employee change withholding at any time? ›

Overall, employees may change their withholding for any reason and may do so whenever they wish. Employers must put an employee's new Form W-4 into effect no later than the start of the first payroll period ending on or after the 30th day after receipt of the revised Form W-4.

How long does it take for W-4 changes to take effect? ›

If you receive a revised Form W-4 from an employee, you must put it into effect no later than the start of the first payroll period ending on or after the 30th day from the date you received the revised Form W-4.

Should I claim 0 if I am single? ›

Single. If you are single and do not have any children, as well as don't have anyone else claiming you as a dependent, then you should claim a maximum of 1 allowance. If you are single and someone is claiming you as a dependent, such as your parent, then you can claim 0 allowances.

Will I owe money if I claim 1? ›

Claiming 1 on Your Taxes

Claiming 1 reduces the amount of taxes that are withheld, which means you will get more money each paycheck instead of waiting until your tax refund. You could also still get a small refund while having a larger paycheck if you claim 1. It just depends on your situation.

Is it better to claim 0 or 2 on taxes? ›

If you claim 0 allowances or 1 allowance, you'll most likely have a very high tax refund. Claiming 2 allowances will most likely result in a moderate tax refund.

Can you withhold less taxes from paycheck? ›

Adjust your wage withholding Resident withholding

Need to withhold more money from your paycheck for taxes, decrease the number of allowances you claim, or have additional money taken out. Need to withhold less money from your paycheck for taxes, increase the number of allowances you claim.

How to get the most out of your paycheck without owing taxes? ›

It all comes down to how many "allowances" you claim. The more allowances you claim on your W-4, the less income tax will be withheld. If you claim zero allowances, you will have the most tax taken out. Most people fill out their W-4 when they first start a job and never think about it again.

When should employees withhold taxes? ›

Payroll withholding is mandatory when you have employees. The amount you withhold is based on the employee's income. Remit the withheld payroll taxes to the appropriate agencies (e.g., IRS). You can either withhold taxes from employee wages manually or by using payroll tax withholding software.


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