How to Change Your Tax Withholdings Step by Step

Your tax withholding determines how much your employer deducts from each paycheck for taxes. If too little is withheld, you may owe a large tax bill at the end of the year. If too much is taken out, you’re giving the government an interest-free loan instead of having that money available throughout the year.

Adjusting your withholdings ensures you’re paying the right amount in taxes based on your financial situation. Here’s how to do it step by step.

Selecting the Right Withholding Form

The form you need depends on your employment status and income type. Most employees use IRS Form W-4, redesigned in 2020 to eliminate allowances and focus on income adjustments, deductions, and additional withholding amounts. Independent contractors and self-employed individuals don’t use a W-4 but may need to make estimated tax payments using Form 1040-ES.

The W-4 requires details about multiple jobs, spousal income, and dependents to ensure accurate withholding. If you or your spouse have more than one job, the IRS recommends using the online Tax Withholding Estimator to determine the correct entries. This tool helps prevent underpayment, which can lead to penalties, or overpayment, which reduces your take-home pay.

Retirees can adjust withholdings from pension distributions using Form W-4P. Those receiving Social Security benefits who expect to owe taxes can submit Form W-4V to withhold a percentage of their payments. Choosing the correct form ensures taxes are withheld appropriately.

Adjusting Personal Allowances

The IRS no longer uses personal allowances on Form W-4, but adjustments for dependents, tax credits, and deductions still affect withholding amounts.

Claiming dependents lowers withholding. The Child Tax Credit provides up to $2,000 per qualifying child under 17, with $1,600 refundable in 2024. If you qualify for credits like the Earned Income Tax Credit, adjusting your W-4 prevents excessive withholding.

Deductions also impact withholding. If you plan to itemize deductions exceeding the standard deduction—$14,600 for single filers and $29,200 for married couples filing jointly in 2024—you can adjust your W-4. Common deductions include mortgage interest, medical expenses above 7.5% of adjusted gross income, and state and local taxes up to $10,000.

Income from multiple jobs or a working spouse complicates withholding calculations. If both spouses earn similar incomes, checking the “Married filing jointly, both spouses working” box on the W-4 helps distribute withholding more accurately. The IRS Tax Withholding Estimator can help determine the right amount to withhold.

Electing Additional Withholding

If you earn income outside your regular paycheck—such as freelance work, rental income, or dividends—you may need additional withholding to avoid an unexpected tax bill. Instead of making separate estimated tax payments, you can adjust your W-4 to withhold extra from each paycheck.

The IRS imposes penalties if you owe more than $1,000 in taxes when filing and haven’t paid at least 90% of your total tax liability throughout the year. Additional withholding helps meet this threshold, especially if your income fluctuates or includes untaxed earnings. For example, if you expect $10,000 in taxable side income and your marginal tax rate is 24%, withholding an extra $2,400 over the year covers the tax liability.

If you owed money to the IRS last year, reviewing past returns can help determine how much extra should be withheld. The IRS Tax Withholding Estimator can calculate a precise amount, helping you avoid another large tax bill.

Submitting to Your Employer

Once you’ve adjusted your tax withholding, submit the updated W-4 to your employer. Changes typically take effect in the next payroll cycle. Employers must implement withholding changes as soon as administratively feasible, usually within 30 days, but processing times vary.

Many companies use electronic payroll platforms like ADP, Paychex, or Workday, allowing employees to update W-4 forms digitally. If your employer requires a paper form, submit it to the HR or payroll department. Keeping a copy of your updated W-4 ensures you have a reference if discrepancies arise.

Verifying Changes on Pay Stubs

After submitting your updated W-4, check your pay stubs to confirm the adjustments were applied correctly. Employers usually implement changes within one or two pay cycles. If the expected changes aren’t reflected, contact your payroll department promptly.

Pay stubs show federal income tax withheld, along with Social Security and Medicare deductions. Compare these amounts to previous pay periods to ensure the adjustments align with your expectations. If you elected additional withholding, verify that the extra amount is being deducted. Tracking year-to-date tax withholdings helps assess whether further adjustments are needed, especially if your income changes.