Big Refund or Bigger Paycheck? How to Adjust Your W-4

Getting a big tax refund feels great, but it means you paid more tax than necessary throughout the year. Owing a large amount in April isn’t fun either. The goal is to get close to even.

How withholding works

Your employer uses your Form W-4 to calculate how much federal income tax to take out of each paycheck. The current W-4 doesn’t use “allowances.” Instead, it asks about:

• Your filing status
• Multiple jobs or a working spouse
• Dependents
• Other income, deductions and extra withholding

When to update your W-4

• You get married or divorced
• You have a baby or adopt
• You or your spouse start or stop a job
• You start a side gig
• You qualify for new deductions, like those for tips, overtime or car loan interest
• Your refund or balance due last year was larger than you expected

Use the IRS estimator

The IRS Tax Withholding Estimator on IRS.gov walks you through your income, deductions and credits and tells you exactly what to put on a new W-4. Have a recent pay stub and last year’s return handy.

Refund or paycheck?

• Bigger refund: Some people like the forced savings. But you could earn interest on that money all year in a high-yield savings account instead.
• Bigger paycheck: More money each month to pay down debt or save automatically.

If you like the “lump sum” feeling, set up an automatic transfer to savings for the amount you’d otherwise over-withhold.

Avoid underpayment penalties

You generally won’t owe a penalty if you pay at least 90% of this year’s tax or 100% of last year’s tax through withholding and estimated payments (110% if your income is over $150,000). Self-employed people and those with large investment income may need to make quarterly estimated payments.

Check now, not in April

Adjusting your W-4 in the fall still gives you a few paychecks to correct course for this tax year. It’s one of the year-end moves worth making.