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As millions of Americans begin filing their taxes, experts warn that last year’s withholding mistakes could lead to unexpected bills.
The IRS requires tax payments throughout the year, and many workers do so through automatic withholding on their employer’s payroll checks. You can usually expect a refund if you overpay. In contrast, you may see a tax bill if you haven’t paid enough.
Withholding issues are “always a surprise” for filers who hold multiple jobs, said Joanne May, a certified financial planner and principal at Forest Asset Management in Berwyn, Illinois. . She is also a certified public accountant.
For example, let’s say you earn a total of $60,000 in three jobs ($20,000 each) and your company withholds taxes from your paycheck.
Because companies don’t know your total income, “employers end up withholding a much lower percentage,” May explained.
Similar withholding issues can arise when changing jobs.
For example, if you earned $100,000 with one company in the first eight months of 2023 and $50,000 with a second employer in the last four months, your second employer would have sufficient tax withholding. It may not have been. “That’s a place I look at a lot,” May added.
Withholding tax should not be a “one and done”
John Lloyd, CFP and registered agent and owner of The Wealth Planner in Fort Worth, Texas, says that even if you have a major life event and don’t ask your employer to update your tax withholding on Form W-4. That said, errors may occur.
For example, if you get divorced, your filing status will change from filing jointly to filing alone, and your standard deduction will be cut in half, he said. For 2023, the standard deduction is $27,700 for him if the couple files jointly, but $13,850 for her if she files alone. If you don’t adjust your withholding to reflect your new single status, you may not pay enough tax for the year.
Other life changes that can affect your tax withholding include having a baby, losing your job, or receiving unemployment income. The IRS says adjustments can “avoid unintended consequences” such as large refunds or unpaid balances.
Experts recommend making adjustments at the beginning of the year, but say it’s important to revisit them regularly and make changes as needed.
Lloyd added that withholding taxes “shouldn’t be a one-time thing.”
