How your W-4 impacts your paycheck & tax refund

If you have an employer, you likely filled out a W-4 tax form when you started your job. You may not have thought about it since, but it's not a "set it and forget it" document. You can adjust your W-4 at any time to change how much federal tax is withheld from your paycheck.

Regularly reviewing your W-4 to match your current financial situation can help you avoid underpayment penalties and surprise tax bills.

Learn how federal income tax withholding works, how your W-4 affects your paycheck and refund, and how to use it to plan ahead for tax season.

Withholding tax is the amount your employer sends to the IRS from each paycheck to cover your annual federal income tax liability. The U.S. tax system expects you to pay throughout the year either with withholdings that your employer submits for you or estimated quarterly payments that you submit yourself.

The W-4 form aims to help you match the total amount withheld from your paycheck over the year with what your annual income tax liability will be. Accurately filing out the W-4 helps you end up with either a small tax balance due (rather than a large lump sum) or a small tax refund (rather than a big one, which may seem exciting, but generally means you were giving the government too much of your money throughout the year). Generally, the goal is to get as close to zero at the end of the tax year as possible.

Some states also use a W-4 for state income tax purposes for the same reason. Check with your state tax agency to find out if it applies to you.

Withholding tax isn't the only federal tax taken out of your paycheck. Federal Insurance Contributions Act (FICA) taxes fund your Social Security and Medicare benefits. But while FICA withholdings are a standard percentage, withholding tax is different for every worker based on how you fill out your W-4.

With your W-4, you're telling your employer how much federal income tax to take out. A higher withholding means you pay more taxes per paycheck while a lower withholding means you keep more per paycheck.

The withholding tax applies to your regular pay, tips, commissions, bonuses and vacation pay as well as pensions. It also can apply to work-related reimbursements and other expense allowances given to you by your employer.

The percent withheld for each person varies based on the information you provide on your W-4 about your income, adjustments you want to make and the tax deductions and credits you plan to take.

These are the key information points that help you determine how much to withhold from your paycheck when filling out your W-4:

• Filing status. Will you file taxes as single, married filing jointly, married filing separately, the head of household or a qualifying surviving spouse?
• Income sources. How much income do you have from your highest-paying job and other sources, like additional jobs, self-employment, investments or unemployment? If you're married, what income sources does your spouse have?
• Claimed dependents. How many qualifying children under age 17 or other dependents do you have? (Only applicable if your total income is $200,000 or less as a single filer or $400,000 if married filing jointly.)
• Taxable income reductions. Do you...
  
  • Contribute pre-tax money to a traditional 401(k), health savings account or flexible spending account?
  • Have income adjustments, like a student loan interest deduction, an educator expense deduction, alimony paid, etc.?
  • Plan to take standard or itemized deductions?
  • Expect to qualify for and take tax credits, such as for child care, education, energy efficiency, business, etc.
• Extra withholding. Do you want to elect to have more taken out?

The IRS offers a tax withholding estimator you can use to help you determine how much of your paycheck should be withheld to come close to what your annual income taxes will be. 

Remember, the goal of the W-4 is to estimate what your income taxes will be and pay them out of your paycheck throughout the year. Where you land across the tax brackets will be a factor.

In an extremely simplified example, let's say Sam is completing a W-4 for his $45,000-per-year job. They plan to take the standard deduction and have no dependents:

For comparison, let’s say Alex has the same job as Sam but works another part-time job that pays $10,000 per year and has one dependent child. Their taxable income and tax credits are just a bit different, so the withholding is different, too.

You can lower your W-4 withholding by reducing taxable income through pre-tax contributions and eligible deductions. It's why the IRS recommends factoring in any pre-tax contributions income adjustments and tax deductions. These can be subtracted from your gross income (which includes everything you earn) to give you a taxable income. You also should have an idea if you'll take the standard deduction or itemize; one may lower your taxable income more than the other.

Another factor that can help reduce your total income tax owed is qualifying for and taking tax credits. Rather than reducing your income, these are dollar-for-dollar reductions of your calculated tax amount.

It can be risky, however, to count on your annual tax bill being low. If something changes and you end up not withholding enough throughout the year, you could be caught short. You don't want to have to scramble to find money for a larger-than-expected income tax payment and possibly face IRS penalties.

On the flip side, there are reasons you may want more money taken out of your paycheck. These include:

• You have multiple jobs or file taxes jointly with a working spouse. A higher withholding can help ensure you don’t underpay taxes.
• You want to account for other taxable income that is not subject to withholding, such as interest, dividends and money earned from a side gig. (Alternatively, you could make estimated tax payments.)
• You have significant deductions or credits that vary year to year, and you want to avoid underpayment penalties.
• You want to encourage yourself to build savings by having an excess chunk of your paycheck taken out and returned to you in the form of a big tax refund.

You can revise your W-4 at any point in the year by submitting a new one to your employer. While the IRS has no limitations on how many times you can update it, employers do need time to process changes. Guidelines say that a revised W-4 has to go into effect no later than the beginning of the first payroll period ending on or after 30 days of receipt.

There are certain life events that require you to update your W-4. When personal circumstances change, such as your marital status or eligibility for deductions or credits, and it reduces the amount of withholding you're entitled to, you have to submit a new W-4 within10 days. You also need a new W-4 anytime you start a new job.

Changes to tax laws are one more reason to revisit your W-4. For instance, the One Big Beautiful Bill Act (OBBBA) introduced several new or enhanced deductions that might be relevant, including for qualified tips and qualified overtime compensation.