The importance of reviewing your tax withholding early

Each year, many people are surprised during tax season. They either owe more than anticipated or receive a large refund. 

Most of the time, the root of the problem comes down to one thing: improper withholding.

The IRS follows a pay-as-you-go system, which means taxes are generally due throughout the year, not just on April 15. If too little is withheld from your paycheck (or if you’re self-employed, if you don’t set aside enough for estimated payments), that surprise balance due starts building in the background. The opposite can happen too: too much withheld, and now your money’s been sitting with the IRS when it could’ve been in your savings account or working for you elsewhere.

By planning ahead and proactively managing withholding, you not only reduce potential penalties but also ensure you’re paying only what you owe—no more, no less. 

Why checking withholding early matters

It's important to check your withholding early because the sooner you do it, the easier it will be to make adjustments. Identifying a shortfall now gives you time to adjust gradually—maybe by tweaking your Form W-4 or increasing estimated payments. This approach is far better than rushing to come up with a lump sum next April and potentially facing underpayment penalties.

Beyond the numbers, life events can significantly influence your tax situation. If you recently got married, welcomed a child into your household, changed jobs, or received a raise, your withholding needs to be revisited. 

A mid-year review is often ideal, so you can spread any changes across multiple pay periods or estimated payment dates.

The IRS tax withholding estimator

If you’re wondering where to start, the IRS Tax Withholding Estimator is an excellent tool. It’s available online for free and easy to use. You simply provide information about all your income sources, including wages, side-job earnings reported on Form 1099-K, or investment dividends. The Estimator then suggests how much you should withhold or set aside to avoid a surprising balance due at tax time or an overly large refund.

Before using this tool, it’s a good idea to gather your most recent pay stubs, last year’s tax return, and records of any extra income. You’ll be asked about various forms of compensation, deductions, and credits. Once you input your details, the Estimator provides a snapshot of how well your current withholding measures up against your expected tax bill for the year. If adjustments are recommended, it will even guide you toward filling out a revised Form W-4 or recalibrating your voluntary withholdings for estimated taxes. 

How to adjust your withholding

Once you’ve run the numbers and you know you’re off-track, the next step is to make the adjustment.

• If you’re employed: file an updated Form W-4 with your HR or payroll department. You can request a specific dollar amount to be withheld each paycheck or adjust your allowances accordingly.
• If you’re self-employed: you’ll want to recalculate and increase your quarterly estimated payments to stay ahead.

Don’t forget—this isn’t a one-and-done deal. Make it a habit to check your withholding once a year, or any time your income or life circumstances change in a big way.

Special considerations and complex situations

While the Tax Withholding Estimator covers most typical scenarios, some taxpayers have more complex situations. For instance, you might be responsible for the alternative minimum tax (AMT) or have significant investment income, such as long-term capital gains and qualified dividends. These circumstances require special consideration when calculating withholding amounts.

Keep your cash flow in check

Tax withholding probably isn’t the most exciting item on your financial to-do list but getting it right can have a significant impact on your finances. Proper withholding helps you avoid penalties, improves your cash flow throughout the year, and makes tax season a lot less stressful. 

So if you haven’t reviewed your withholding lately, now’s a great time. If you’re dealing with a more complicated situation, contact us for personalized assistance.