When you move to a new country, there’s plenty to get your head around—not least how taxes work when you have a job. In the US, employers withhold an amount from your paycheck, known as “tax withholding,” which varies depending on different factors and circumstances.
We’ve created this Remitly guide to help you understand tax withholding. Learn about Form W-4, how to make adjustments, the key factors that influence withholding, and the benefits of getting it right.
Overview of tax withholding
Tax withholding, often called federal income tax withholding, is the amount your employer takes out of your paycheck to cover your federal income taxes. The amount is based on the details you provide on your IRS Form W-4. It helps determine whether you’ll owe taxes or get a refund when you file.
Tax withholding can get tricky if your income changes, you work multiple jobs, or experience a major life event like marriage or a new baby, so it can be useful to understand how it works to ensure you’re paying the right amount.
Understanding Form W-4
The Form W-4—the Employee’s Withholding Certificate—is a document you complete to inform your employer how much federal income tax to withhold from your paycheck. The information you provide helps ensure that the correct amount of tax is deducted, aligning with your tax obligations and financial goals.
Key components of Form W-4:
Step 1: Personal information
Enter your full name, address, Social Security number, and filing status (e.g., Single, or Married filing jointly/separately).
Step 2: Multiple jobs or spouse works
Complete this step if you have more than one job or if you’re married and your spouse works. This ensures accurate withholding across all income sources.
Step 3: Claim dependents
If your total income is $200,000 or less ($400,000 if married and filing jointly), you can claim dependents to reduce your withholding.
Step 4: Other adjustments
- Other income (not from jobs)
- Deductions other than the standard deduction
- Any extra amount you want withheld from each paycheck
Step 5: Sign and date
Your signature certifies that the information provided is accurate.
Special forms like Form W-4P (for pension and annuity payments) and Form W-4V (for voluntary withholding from government payments like Social Security) serve similar purposes by allowing withholding from non-wage income.
How to complete Form W-4 accurately
- Assess your tax situation: Consider factors like multiple jobs, your spouse’s income, dependents, and extra income sources
- Fill out the form: Complete each step of Form W-4 as applicable to your situation
- Submit the form to your employer: Once completed, submit the form to your employer so they can adjust your withholding accordingly
- Review annually or after major life changes: It’s advisable to review and, if necessary, update your W-4 annually or after significant life events such as marriage, divorce, the birth of a child, or changes in income
Regularly reviewing and adjusting your tax withholding helps you stay ahead of unexpected tax bills and better manage your finances.
How to adjust your tax withholding
Adjusting your tax withholding is a process that starts with understanding how to calculate and modify your withholding based on your financial situation.
Steps to calculate and modify your withholding
When calculating and adjusting your tax withholding, consider both federal and state tax rules. Each state has its own requirements, which can impact your overall tax situation.
Step 1: Add up your withholding
Look at your pay stub to find how much federal tax is withheld. For example, if $150 is taken out of each paycheck and you’re paid twice a month (24 times a year), your total annual withholding would be $3600.
If you’re married and you and your spouse work, combine your withholding to get your total household amount. If you’re self-employed, you’ll pay estimated taxes rather than using W-4 withholding, so you need to set aside tax money yourself.
Step 2: Calculate your taxable income
Now, figure out your taxable income (the income the IRS will use to calculate your tax bill). Start with your gross income (salary, freelance work, interest, etc.), then subtract adjustments like student loan interest, contributions to retirement accounts like traditional IRAs or 401(k)s, or a Health Savings Account (HSA). Also subtract any tax deductions, like the standard deduction (for single filers, it was $14,600 in 2024).
Step 3: Estimate how much you owe
Once you have your taxable income, you can estimate your tax liability (how much you owe). For example, if your taxable income is $81,500 (for a married couple filing jointly), you’ll pay 10% on the first $23,200 and 12% on the rest.
After calculating, subtract any tax credits you qualify for (like the Earned Income Tax Credit), which can reduce your tax bill dollar for dollar.
Step 4: Compare withholding and liability
Next, subtract your withholding from your estimated tax bill. If your withholding is higher than what you owe, you’ll get a refund. If it’s lower, you may need to pay the difference when you file.
Step 5: Adjust your withholding
If you’re not on track (maybe you’ve been getting large refunds or high tax bills), adjust your withholding by filling out a new Form W-4 and submitting it to your employer ahead of tax season.
If you want more withheld, increase the amount on your W-4 in Step 4c. To reduce the amount withheld, update your information in Step 3 (dependents) or 4a and 4b (other income and deductions). If you’re unsure, you could meet with your HR department or a tax professional to help make sure your withholding is right.
Tools and resources for estimating withholding adjustments
Estimating your tax withholding adjustment is easier with the right tools and resources.
This online tool helps you estimate the federal income tax your employer can withhold from your check. It shows how your withholding affects your refund, take-home pay, or tax owed.
IRS Publication 505
This publication provides detailed information on tax withholding and estimated taxes, including how to adjust your withholding based on various factors. Access the IRS Publication 505 for comprehensive guidance.
Tax professionals
Consulting with a tax professional can help you get personalized advice tailored to your specific financial situation.
Factors influencing tax withholding
Life events and circumstances can impact how much tax is withheld from your paycheck.
Marital status changes
If you get married or divorced, your filing status may change (e.g., from single to married filing jointly or to head of household). This will likely change your tax bracket and how much you need to withhold.
If you and your spouse are employed, you may need to account for both incomes to adjust your withholding correctly.
Dependents
Having children or other dependents can lower your tax bill. With dependents, you may qualify for credits like the Child Tax Credit, which reduces your tax liability.
This means you may need to withhold less from your paycheck. Be sure to update your Form W-4 to reflect any changes in dependents.
Income changes
If you get a raise, switch jobs, take on a second job, or start a business, your income will likely go up. A higher income could push you into a higher tax bracket, so you may need to withhold more. Consider adjusting your withholding if your income changes to avoid a tax bill at the end of the year.
Other major life events
Events like buying a home or retiring can also affect your taxes. For example, the acquisition of a house could qualify you for itemized deductions such as mortgage interest, lowering your taxable income.
Retiring could change your income level and deductions. It’s a good idea to adjust your withholding if you experience significant life changes.
Impact of filing status and allowances
Your filing status and the number of allowances you claim affect how much tax is withheld from your paycheck.
Filing status
Your filing status determines your tax rate and the amount of tax you pay. Options include Single; Married Filing Jointly; Married Filing Separately; Head of Household; and Qualifying Widow(er). Each status has different tax implications and affects your withholding.
Allowances
The number of allowances you claim on your Form W-4 influences how much tax is withheld. If you claim more allowances, less tax is withheld, which means you take home more pay. Claiming fewer allowances leads to more tax being withheld from your paycheck.
Consider reviewing and updating your Form W-4 regularly, especially after life changes, to make sure your withholding matches your current tax situation. You can also make estimated tax payments throughout the year to avoid penalties.
Benefits of proper tax withholding
Proper tax withholding offers several advantages, such as:
Avoiding surprise tax bills and maximizing refunds
Proper tax withholding ensures that enough tax is deducted from your paycheck, helping you avoid a surprise tax bill when you file your return. Accurately adjusting your withholding can also minimize the risk of underpaying your taxes.
Over-withholding, on the other hand, can lead to a larger-than-expected tax refund, which some people may prefer as a form of savings or an emergency fund. However, this means you’re essentially giving the government an interest-free loan.
Improved financial planning and budgeting
Having your withholding set correctly helps maintain more predictable and consistent cash flow. It also enables better financial planning by preventing the need to scramble for funds at the end of the year to cover a tax bill.
Additionally, it helps integrate your tax obligations seamlessly into your overall budget, making it easier to plan for savings, investments, and expenditures without unexpected tax surprises draining your plans.
Reducing the risk of penalties and interest
When your withholding is too low and you end up owing a large sum at the end of the year, the IRS may impose penalties and interest for underpayment.
Proper withholding helps you avoid this risk by ensuring that the correct amount is deducted in each pay period, reducing the chance of getting hit with these additional costs.
More accurate tax filing
When you withhold the right amount throughout the year, it helps make your tax filing process smoother. You won’t need to make up for large underpayments with a substantial lump sum.
Accurate withholding leads to a more straightforward and accurate tax return, which can also speed up any potential tax refund processing.
Reduced stress and fewer financial surprises
A major benefit of proper withholding is the peace of mind it provides throughout the year. When you know your tax obligations are being met consistently, you’re less likely to experience the anxiety of potentially owing a large sum when filing taxes. This stability allows you to focus on other important financial goals.
By staying proactive, especially if your income, marital status, or number of dependents changes, you can avoid surprises at tax time, stay compliant, and manage your finances with confidence.
FAQs
Why is it so important to have the proper amount of taxes withheld from your paycheck?
It will help avoid underpaying (which can lead to high tax bills and penalties) or overpaying (which limits your cash flow). Proper withholding helps spread tax liability throughout the year, preventing surprises during tax season and improving financial stability.
What does “99” mean on the Form W-4?
The number 99 on the Form W-4 doesn’t have a specific meaning. It may be used mistakenly when you’re unsure of allowances. The W-4 no longer uses allowances (from 2020), as you can now complete the form based on filing status, dependents, income adjustments, and extra withholding.
Why do we use withholding tax?
Withholding tax is used to prepay taxes on income like salaries and dividends. It ensures timely tax collection, reduces the risk of large tax bills at year-end, and provides steady government revenue while making tax management easier for individuals and businesses.
Why is it important to review the withholding on your pay stub?
Reviewing your pay stub ensures the correct amount is withheld based on your current life situation. Changes like marriage, children, or job changes can affect your withholding. Regular checks help avoid underpayment or overpayment at the end of the year.