Does your personal tax season unfold the same way every year?
April 15th approaches, and suddenly, there’s a scramble to gather receipts, fill out forms, and hit submit, hoping for a nice chunk of change from Uncle Sam.
But what if you need cash now, instead of a lump sum later?
But what if there was a way to get that money back throughout the year, instead of waiting for a lump sum later?
Many people don’t realize you can adjust your withholding mid-year.
By reducing the amount withheld from your taxes, you increase your take-home pay throughout the year, effectively getting your “refund” in smaller increments with each paycheck rather than waiting for a lump sum refund after you file your taxes.
Let’s explore what this means, if it makes sense for you, and how to do it!
What is Withholding?
As a salaried employee, your employer withholds a portion of your paycheck for federal income taxes.
This withholding is based on the information you provide on Form W-4, the “Employee’s Withholding Allowance Certificate.” This form considers factors like your marital status, dependents, and any additional income sources to determine how much tax is withheld from each paycheck.
Think of it like a prepayment on your annual tax bill. Ideally, the amount withheld throughout the year should be close to what you actually owe in taxes. However, life happens – you might get a raise, start a side hustle, or have a major life change. These events can throw your withholding off track.
What is adjusting withholding?
Adjusting withholding is the process of updating the amount of federal income tax withheld from your paycheck. This is done by submitting a new Form W-4 to your employer.
The information you provide on the W-4 determines how much tax is taken out each pay period.
By adjusting withholding mid-year, you can ensure you’re paying the right amount in taxes throughout the year.
Why Adjust Withholding Mid-Year?
Here’s why you might consider adjusting your withholding mid-year:
- Too Much Withheld Previously: Did you receive a large tax refund last year? This could indicate that too much tax was withheld from your paychecks. Adjusting withholding can help you get more money in each paycheck.
- Too Little Withheld Previously: Did you owe a significant amount at tax time last year? This could be a sign that not enough tax was withheld from your paychecks. Adjusting withholding can help you avoid a repeat scenario.
- Recent Life Changes: Did you get a raise, bonus, or start a side hustle? These events can increase your income and potentially lead to underpayment of taxes. Adjusting withholding ensures you’re paying the right amount throughout the year.
This strategy can be beneficial if you need the extra cash flow for immediate expenses or investments. However, it requires careful planning to ensure you still have enough withheld to cover your tax liability, avoiding underpayment penalties.
Example Scenario
If you typically receive a $2,400 tax refund, this means an extra $200 was withheld from your paycheck each month. Adjusting your withholding to reduce this over-withholding could give you an additional $200 per month in your paycheck, rather than waiting until tax season to receive the refund.
How to Adjust Withholding Mid-Year
The good news is that adjusting withholding is a simple process for most people. Here’s what you need to do:
- Review Your Pay Stubs: Analyze your recent pay stubs to see how much tax is currently being withheld.
- Use a Tax Withholding Calculator: Online tax withholding calculators or some tax software can help you estimate your tax liability based on your current income and life situation. The IRS provides a free withholding calculator as a starting point.
- Complete a New Form W-4: Based on your calculations and using the information from the withholding calculator, fill out a new Form W-4. This form allows you to adjust the amount withheld from your paycheck moving forward.
- Submit the Form W-4 to Your Employer: Provide your completed Form W-4 to your payroll department or HR representative.
- Check your Paychecks: Review your paychecks to make sure the changes have been made. The adjustments will typically be reflected in your paychecks within one or two pay cycles.
- Review Regularly: Reassess your withholding periodically, or if your financial situation changes, to ensure you’re not under or over-withholding.
Self-Employed Individuals and Side Hustlers
While this article focuses on salaried employees with traditional W-4 withholding, managing your tax burden throughout the year applies equally to self-employed individuals. Unlike salaried workers, you’re responsible for making estimated tax payments quarterly based on your projected income from all sources, including your side hustle.
Here’s a high-level overview for side hustlers:
- Track your income and expenses: Keep meticulous records of your side hustle income and any related business expenses.
- Estimate your tax liability: Use a tax calculator or consult a tax professional to estimate your total tax liability for the year, considering both your main job and side hustle income. Use your budget as a guide and tool.
- Make estimated tax payments: Use Form 1040-ES to make quarterly estimated tax payments throughout the year. These payments ensure you’re contributing your fair share of taxes and avoid penalties come tax time.
Check out our article on estimated taxes for self-employed individuals and side hustles.
Want Help Adjusting Your Withholding?
Adjusting withholding mid-year empowers you to manage your tax burden throughout the year. Being proactive can save you money. By taking control of your withholding, you can avoid a last-minute scramble come tax time and ensure you’re getting more money in each paycheck. No more waiting for a refund – it’s like getting your “refund” early, spread out comfortably throughout the year.
Our friendly team at Momentum Tax are experts in adjusting withholding and all of your other tax conundrums. Get in touch today for a free consultation!
