The Feds are holding your money! Why you need to update your tax withholding
Up until recently, I’ve always assumed everyone waits until the beginning of the following year to get their tax refund from the prior year. In my 20’s I’d typically get anywhere from $1,000 – $3,000 back each year, which means my employer was deducting too much money from each of my paychecks every 2 weeks – and I was waiting until the beginning of the following year to get it back from Uncle Sam.
But what if I told you there was a way to make sure that your employer is NOT deducting this excess money?
Would you rather have your money right when you are owed it, so that you can invest it to make MORE money, or wait until the beginning of the following year to get your money back from the Feds?
The choice is yours.
This is where the IRS Tax Withholding Estimator comes in.
This tool will take in your info (income, deductions, filing status, credits) and estimate your tax obligation for the year. If your current withholding (the amount your work is withholding from your paycheck) is greater than your estimated tax liability, then it will tell you what to adjust on your Form W-4 so that less (or more) of your money is withheld each paycheck by your employer.
As an example…
This person (Bob) put in all his information into the calculator and learned that his employer will be withholding $7,130 for year 2025. However, Bob is only expected to owe $3,184! Meaning Bob will be overpaying federal taxes by $3,946! Bob can either wait until early 2026 and file for his refund, or he can change his form W-4 right NOW so his employer stops withholding this excess money from his paychecks.
This is a massive deal for a lot of people and I’m honestly shocked people don’t realize this.
After you fill out the form and get this result, the calculator tells you exactly what to change on your W-4. (most people will be able to change the entries on their W-4 on their company’s HR website. If your company doesn’t have an HR website, then just tell the head of HR you need to change something on your Form W-4)
For this person, the form told them to ‘Enter $3,560 for Claim dependents’. Also, to ‘Enter an amount of $6,691 on Step 4(a) of Other Income’.
Now you might be wondering … “but does Bob actually have $3,560 in dependents, and $6,691 of other income?” (Bob does not)
Your employer withholds money assuming the money you make every 2 weeks will continue for the whole year. Bob happens to be stopping his job this July, meaning his employer thinks he is going to make WAY more money for the year than he actually will.
In the grand scheme of things – this form means nothing. Bob will still have to file taxes at the end of the year, and pay any money that he may owe. Adding dependents and any other things to your W-4 is just a way to correct for the fact the form doesn’t have all the information.
There’s just not currently a way to tell your employer “I’m only working for 6 months this year so please judge my withholding based on this”
The Bottom Line
Fill out the IRS’ Tax Withholding Estimator and update your W-4 so that you don’t have to wait until next year to get the money that you are OWED! Or don’t, and let your hard-earned money sit in the hands of the Feds for up to a year.
Sam