If you had a surprise tax bill this season or your refund was smaller than expected, it may be a good time to review your paycheck withholdings.
The IRS collects taxes throughout the year, typically through paycheck withholdings for W-2 employees or quarterly estimated tax payments for self-employed workers. You can expect a refund if you've overpaid or a tax bill for not paying enough.
One way to help avoid a 2023 tax bill is by using the IRS paycheck withholding estimator, according to Sheneya Wilson, a certified public accountant and founder of Fola Financial in New York.
The free calculator shows how your current withholding affects your take-home pay, next year's refund or tax bill.
Review withholdings 'at least at mid-year'
Wilson tells her clients to double-check withholdings "at least at mid-year" or more often for those expecting bigger payments throughout the year. "The calculator definitely does allow taxpayers to see if they are on track," she said.
However, you'll need your most recent paycheck, preferably close to your last payment date for accuracy. "With the wrong information, it can do more harm than good," Wilson said.
You should skip the calculator if "your tax situation is complex," according to the IRS, such as filers with alternative minimum tax for higher earners and certain investment income.
"The biggest thing is taking an inventory of what happened last year" and making the necessary adjustments, she added.
Common reasons to change withholdings
You typically complete Form W-4 when starting a new job, which tells your employer how much to withhold from each paycheck for federal taxes. But there are several reasons why the form may need to be updated and resent to an employer.
For example, there may be family changes like marriage, getting divorced or welcoming a child into the family, Wilson said. Other lifestyle changes, such as buying a home or major income shifts, may also affect next year's taxes, according to the IRS.
Top reasons to adjust your withholding:
1. Tax law changes
2. Lifestyle changes like marriage, divorce or children
3. New jobs, side gigs or unemployment
4. Tax deductions and credits shifts
Of course, withholdings may also come down to personal preferences, such as the desire to receive a refund every year, said certified financial planner Kevin Brady, vice president at Wealthspire Advisors in New York.
However, if you discover you're not on track, "there always is the option to make a quarterly estimated payment," Brady explained.
As of April 7, the IRS issued over 69 million refunds, with an average payment of $2,878, more than 9% smaller than the average refund at the same point last tax season.
