How to Manage Your Tax Withholdings: A Guide to Keep You on Track for Tax Time

Taxes are an inevitable part of life, but managing your tax withholdings can help you navigate your tax liability more effectively. It’s important to manage your tax withholdings so you can ensure that you’re not overpaying or underpaying your taxes throughout the year and to prevent surprises when filing your tax return each spring. For those who overwithhold, this also ensures you keep more of your money in your pocket throughout the year, rather than collecting a large refund. In this guide, we’ll explore some key tips to manage your tax withholdings like a pro.

Know your tax bracket

One of the first steps to manage your tax withholdings is to understand your tax bracket. Your tax bracket determines the percentage of your income that you owe in taxes. For 2024 & 2025, there are seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. By knowing which bracket you fall into, you can more easily see if your withholdings appear need adjusted and to do so accordingly. If you’re in a lower tax bracket, you may be able to withhold less from your paycheck, allowing you to keep more of your money throughout the year.

Use the IRS withholding tool

The IRS provides a Tax Withholding Estimator that can also help you determine the appropriate amount to withhold from your pay. By entering some basic information about your income, deductions, and credits, along with how often you’re paid, the calculator can estimate your tax liability and suggest adjustments to your withholdings by populating new W-4s.

This tool is especially useful if you’ve experienced major life changes, such as getting married, having a child, or buying a home, which can affect your tax situation. The tool works best for those with W-2 income only, though it can also be used for those with more complex income situations. For those with large amounts of rental, self-employment, investment, or other sources of non-W-2 income, it’s best to work with a tax professional in order to calculate your necessary withholding amounts on a rolling, quarterly basis in order to achieve the most accurate results.

Adjust your W-4 manually

Your W-4 form is what your employer uses to determine how much federal income tax to withhold from your paycheck. It’s important to review this form regularly to ensure that it accurately reflects your tax situation. If you’ve had any significant changes in your life or finances, such as getting a raise, getting married, or buying a house, you may need to update your W-4 to adjust your withholdings accordingly.

In addition to federal income tax, there may be other taxes that you need to withhold such as state income tax or local income tax. Be sure to take these into account when determining your total withholdings. As stated previously, if you’re self-employed or have other sources of income, you may also need to make estimated tax payments throughout the year to avoid underpayment penalties.

Monitor your paystubs

Ensure that the correct amount of tax is being withheld from your pay by keeping an eye on your paystubs throughout the year. You can calculate the withholding percentage by dividing your current federal tax withholding (often listed as FITW) by your current gross pay. If your withholding is, for example, 8% of gross pay but you’re in the 24% tax bracket, you can quickly see that it likely needs adjusted. It’s best to check your withholdings on a quarterly basis at minimum. If you notice any discrepancies, follow up with your tax professional or payroll department to make sure everything is in order. It’s better to catch any issues early on rather than being hit with a big tax bill come tax time.

Withholding the proper amount of federal and state income taxes is always the responsibility of the taxpayer, never the employer. This means that even if your employer withholds zero taxes despite your W-4 request, you are liable for any penalties and interest due to underpayment.

Adjust as necessary

Finally, don’t be afraid to adjust your withholdings as needed throughout the year. If you find that you’re consistently getting a large tax refund or owing a lot of money at tax time, it may be time to revisit your withholdings and make some changes. Remember, the goal is to have just the right amount withheld so that you neither owe a large amount nor receive a large refund.

Managing your tax withholdings effectively can help you keep more of your hard-earned money throughout the year and prevent a large tax bill upon filing your return. By understanding your tax bracket, using tools like the IRS Withholding Estimator, reviewing your W-4 form, considering additional withholdings, monitoring your pay stubs, and adjusting as needed, you can ensure that you’re not overpaying or underpaying your taxes. Although it requires some planning and effort, by managing your tax withholdings year round your tax return filing will be less stressful and more predictable.