Most people fill out a Form W-4 on their first day at a new job, file it with HR, and never think about it again. But that simple form is one of the most powerful tools you have for managing your year-end tax bill.
Its one and only job is to tell your employer how much federal income tax to withhold from your paycheck. Get it right, and you’ll end up owing very little (or getting a small refund) at tax time. Get it wrong, and you’re either giving the government an interest-free loan all year (a giant refund) or setting yourself up for a nasty tax bill and potential penalties.
Life changes, and so should your W-4. Here are the most common reasons to make an adjustment and exactly how to do it.
Common Reasons to Adjust Your W-4
You can submit a new W-4 to your employer at any time, for any reason. It’s a smart idea to review it at least once a year, or immediately after any major life event.
Top reasons to update your form:
- You Got a Second Job: This is a classic “surprise tax bill” scenario. Your first job doesn’t know about your second, so neither is withholding enough tax to cover your combined income, which likely pushes you into a higher tax bracket.
- Your Spouse Got a Job (or Changed Jobs): Just like having a second job, your household income has now jumped, and your combined withholding is probably too low.
- You Had a Baby or Adopted a Child: This is a happy reason! A new dependent likely qualifies you for the Child Tax Credit, which means you can reduce your withholding and get more money in each paycheck.
- You Got Married or Divorced: Changing your filing status (from Single to Married Filing Jointly, or vice versa) has a huge impact on your tax rate and standard deduction.
- You Have a “Side Hustle”: If you earn self-employment income (like freelancing or driving for a ride-share) and don’t pay quarterly estimated taxes, you can use your W-4 at your “day job” to withhold extra money to cover that side income.
- You Have Other Income: You might have income from interest, dividends, or retirement that isn’t automatically having taxes withheld. You can adjust your W-4 to cover this.
- You Got a Shocking Tax Bill (or Refund): The easiest sign you need an adjustment is what happened last April. If you owed a lot of money, you need to increase your withholding. If you got a massive refund, you’re letting the IRS use your money all year and should decrease your withholding to get bigger paychecks.
How to Make Adjustments on the Form W-4
The modern Form W-4 (post-2020) is much more straightforward than the previous version. You don’t “claim allowances” anymore. Instead, you fill out a five-step form. You only need to fill out the steps that apply to you.
To make an adjustment, you simply give your employer a new, updated Form W-4.
Here is what the key adjustment steps do:
- Step 2: Multiple Jobs or Spouse Works. This is the most critical step for anyone in a two-income household or working multiple jobs. You have three options here to make your withholding more accurate, with the most accurate (and recommended) option being the IRS’s Tax Withholding Estimator.
- Step 3: Claim Dependents. This is where you tell your employer to reduce your withholding. You multiply your number of qualifying children under 17 by $2,000 and your other dependents by $500. The total amount on this line will lower the amount of tax taken from your pay.
- Step 4: Other Adjustments. This section has three key parts:
- (a) Other Income: Add any other income (like from interest, dividends, or retirement) that isn’t from a job. Your employer will factor this in to withhold more.
- (b) Deductions: If you expect to itemize deductions and they will be greater than the standard deduction, you can enter the total here to reduce your withholding.
- (c) Extra Withholding: This is the most direct tool. Want an extra $100 withheld each paycheck to cover your side hustle or just to be safe? Write “$100” on this line.
Taking the time to review and adjust your Form W-4 is a simple yet effective way to manage your taxes throughout the year. By understanding how life changes impact your withholding and utilizing the straightforward steps on the form, you can avoid unexpected tax bills or large refunds, ensuring more money in your paycheck when you need it.
Make it a habit to check your W-4 annually or after any significant life event to keep your tax situation optimized.
