If you find yourself with an unexpected tax bill or a larger-than-anticipated refund this tax season, it might be time to take another look at your paycheck withholding. This process can be somewhat complex, experts note. Generally, if you’ve been overpaying your taxes throughout the year, you end up with a refund. Conversely, a tax bill means you haven’t paid enough. To address this, it’s up to employees to guide their employers on how much federal tax to withhold by using Form W-4.
Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida, points out that the Form W-4 can resemble a “calculus problem.” However, he suggests there’s a straightforward method to figure out the correct amount.
### ‘Back-of-the-napkin’ math for your withholding
Once you’ve filed your 2024 tax return, take a look at the “total tax” amount listed on line 24 of the second page of Form 1040, advises Lucas. If your earnings and tax scenario remain consistent for 2025, your tax liability should be relatively the same.
You’ll then need to calculate how much you’re withholding from each paycheck and determine the number of pay periods remaining in 2025 to ensure you’re on track, according to Lucas. For instance, if your “total tax” for 2024 was $10,000 and you have 23 pay periods left in 2025, you’ll need to withhold about $435 from each paycheck.
To increase your withholding, you can file a new Form W-4, adding “extra withholding” in the “other adjustments” section of step 4. Lucas describes this approach as the “simple, back-of-the-napkin method.”
That said, you need to revisit and adjust your W-4 at the start of each tax year. It’s also wise to update it if your financial situation changes — such as receiving a bonus, starting a second job, getting married or divorced, or having a child.
### Use the IRS ‘tax withholding estimator’
For those whose tax circumstances have evolved or who desire a more detailed update, the IRS provides a free tool called the “tax withholding estimator,” Lucas suggests. “It’s user-friendly and performs quite well,” he comments.
To use this tool, gather pay stubs for all jobs (including your spouse’s) and the most recent tax returns. However, the IRS notes that it may not be suitable if your tax situation is particularly complex.
Sheneya Wilson, a certified public accountant and founder of Fola Financial in New York, points out that if you experience rapid changes in income, investment earnings, or retirement plan distributions, you may need to make quarterly estimated tax payments to avoid IRS penalties.
