Understanding Federal Income Tax Withholding (FITW) - Is Mine Too High?

Thanks for this info. Quick question - on the new W-4, can I just put an additional amount on Step 4(c) to have LESS withheld? I thought that line was only for requesting ADDITIONAL withholding. Is there another box I'm missing where I indicate I want less taken out? Also, how often can I adjust my W-4? Is there a limit to how many times I can change it in a year?

You're right, Step 4(c) is for requesting additional withholding, not less. The way to have less withheld is actually through Step 4(b) where you can list deductions other than the standard deduction, which effectively reduces your taxable income for withholding purposes. You can submit a new W-4 anytime and as often as you want - there's no legal limit. Your employer might have some processing time or internal procedures, but from a tax law perspective, you can adjust it multiple times throughout the year as your situation changes. Most payroll systems implement changes within 1-2 pay periods.

Did you have to pay for this service? How accurate was it compared to what you eventually owed at tax time? I'm in a similar situation with about $15k being withheld on $105k income, and my refunds have been around $4k for the past three years.

I'm skeptical of these online tools. How does it handle things like side income or investment dividends? My situation is more complex because I have my day job but also do some consulting on the side where I don't have any withholding.

The basic analysis was complimentary when I uploaded my most recent pay stub. The more detailed version that created a personalized withholding strategy had a fee, but it was worth it to me to get my money throughout the year instead of waiting for a refund. It turned out to be extremely accurate. I adjusted my withholding based on their recommendations in March last year, and when I filed in February, I ended up with a tiny $87 refund instead of the usual $3k+ I was getting before. That was exactly what I wanted - not owing anything but not lending too much to the government either. For more complex situations with side income, the tool actually handles that too. You can enter information about your consulting income, and it will calculate recommended additional withholding from your W-2 job to cover the taxes on your consulting work. It even accounts for the self-employment tax portion, which is often overlooked when people try to estimate this themselves.

Wait, there's actually a service that gets the IRS to call you back? How does that even work? I've literally spent hours on hold with them before giving up.

Sounds like a scam. Why would I pay for something when I can just keep calling the IRS myself? Also, how do you know the "IRS agent" was legitimate? Could've been anyone claiming to be from the IRS.

It works by basically waiting on hold for you. Their system uses technology to navigate the IRS phone tree and wait in the queue until an agent is available, then they call you and connect you with the agent. It's actually super simple but saves you from having to personally wait on hold for hours. I was skeptical at first too - thought it might be a scam or something. But it's legitimate. When they connect you, you're talking directly to the IRS on their official number. The service just handles the waiting part. The IRS agent I spoke with was definitely real - she looked up my information and everything. It's not like someone random calling claiming to be IRS. You're actually connected to the real IRS phone line when an agent becomes available.

I tried the IRS estimator but it kept giving me errors when I entered my bonus information. Does it work properly if you have irregular income like quarterly bonuses or commission?

The IRS estimator does work with irregular income, but you need to enter it correctly. There's a specific section for bonuses, commissions and other supplemental wages. If you're getting errors, you might be trying to enter it in the regular wages section. One limitation is that it doesn't handle future anticipated bonuses very well if you haven't received them yet. In that case, you might want to complete the estimator now to fix your regular withholding, then revisit and adjust after each bonus payment if needed. The nice thing about the new W-4 is you can update it multiple times throughout the year as your situation changes.

Thanks for the payroll perspective! But I'm a bit confused about your suggestion - the box in Step 2(c) is meant for people with multiple jobs or a working spouse, right? Since I only have one job, wouldn't checking that box actually INCREASE my withholding rather than reduce it?

You're absolutely right, and I apologize for the confusion! I was thinking about the wrong scenario. Since you only have one job, you should NOT check box 2(c) as that would increase your withholding. For your situation with a single job, the best approach is to use the IRS Withholding Estimator or enter an amount in Step 4(b) for deductions to reduce withholding. If you have any deductions you'll claim on Schedule A (like mortgage interest, charitable contributions, etc.), entering their estimated annual total in 4(b) will lower your withholding appropriately. If you take the standard deduction, you could also use 4(b) to effectively reduce withholding by entering an amount that would simulate having deductions.

This is really helpful! I had no idea you could essentially claim your standard deduction on the W-4 form ahead of time. That makes so much sense - why let them withhold as if you have zero deductions when you know you'll be taking the standard deduction anyway? Just to make sure I understand correctly - for 2024, I would put $14,600 in Step 4(b) as "Deductions" even though I'm taking the standard deduction and not itemizing? And this wouldn't cause any issues come tax time since I'll actually be claiming that same standard deduction on my return? Also, did your tax preparer mention anything about how this affects the accuracy if you have other income sources or if your situation changes mid-year?

@Sean Doyle That s'exactly right! You can put $14,600 in Step 4 b(for) 2024 since that s'the standard deduction amount. The withholding system will reduce your taxes withheld throughout the year by the appropriate amount, and then when you file your return, you ll'claim that same $14,600 standard deduction. It all balances out perfectly. This approach works great if you have a single job with consistent income. If you have multiple income sources or your situation changes significantly during the year, you might need to recalculate. But for most people with one W-2 job, this is a simple way to get much more accurate withholding. I ve'been doing this for the past couple years and it s'worked out really well - my refunds went from around $4k down to under $500, which means I get to keep more of my money throughout the year instead of giving the government an interest-free loan!

Great question about making the change mid-year! You're right to think about the timing. Since we're in late 2024, you'll want to be a bit careful about putting the full $14,600 standard deduction amount on your W-4 right now. The withholding system will spread that deduction reduction across your remaining pay periods, which could result in too little being withheld for the short time left in the year. Instead, you might want to calculate a smaller amount for the rest of 2024, then update your W-4 again in January 2025 with the full standard deduction amount. For example, if you have 4 pay periods left in 2024, you might only put about $2,400-3,000 in Step 4(b) to avoid underwithholding. Then in January, submit a fresh W-4 with the full $15,000 standard deduction for 2025 (the amount typically increases each year). Alternatively, you could just wait until January to make the change and get the full benefit for all of 2025. That might be the safest approach to avoid any surprises when you file your 2024 return!

Thanks for mentioning the life changes factor! That's something I hadn't considered. I'm actually planning to get married next year, so I'll need to remember to revisit my W-4 when that happens. Quick question about the online payroll portals - do you know if changes submitted through those systems still follow the same 30-day processing rule that @Mateusius Townsend mentioned earlier? Or do they typically get implemented faster since they re'electronic? Also, for anyone else following this thread, I just wanted to mention that I finally bit the bullet and used the IRS Withholding Estimator today. It recommended putting $12,800 in Step 4 b(for) my situation which (is less than the full standard deduction amount, probably because of my income level and tax bracket .)The tool was actually much easier to use than I expected once I had my pay stub in front of me.