Don’t Underestimate the Power of Your W-4

As important as our paychecks are, many of us don’t pay close attention to how much our employer is taking out for taxes unless it comes up at tax time. We know it feels like a heck of a lot, but beyond that, is it the right amount? It’s a bit of a black box.

Updating your IRS Form W-4 — the tax withholding certificate that you fill out for your employer — can make a big difference to your paycheck, your return or both. If you haven’t reviewed it since you were out of work, got a second job, bought a house, or had another big life change like a marriage or divorce, start 2025 ahead of the game by doing that now.

January is a good time because federal income taxes work on a pay-as-you-go system, with the money that’s withheld from each of your paychecks sent to the IRS throughout the year. Think of your W-4 as your instructions to your employer: If all goes well, your total withholding should be just right by year’s end. If you don’t pay enough, you can end up with a big tax bill and maybe even a penalty. If you overwithhold, your paycheck is unnecessarily smaller. (Though if you actually love getting a big refund, you’re not alone. We’ll explore the pros and cons of it in a future newsletter.)

And if you haven’t filled out a W-4 since the pandemic, you’re in for a surprise: It was overhauled in 2020 because of changes made in the 2017 Tax Cuts and Jobs Act. The new form eliminated “allowances,” but you’ll be shocked to hear it’s still not very intuitive.

Thankfully, the same year the IRS launched the Tax Withholding Estimator, an online tool that’s relatively simple to use as long as you have a pay stub (and don’t mind waiting until Jan. 15, when a scheduled service outage ends.) It will estimate how much you will owe or get back if you don’t change anything. And it will even fill out a new W-4 for you — suggesting specific numbers to lower or raise your withholding. (Don’t worry, it doesn’t ask for your name or record the information you input.)

So what? Your W-4 is powerful. Even if your household income hasn’t changed much in the last year or so, it’s worth reviewing your withholding — especially if you owed money or got a lot back the last time around. You can even tinker with the amounts to see how it affects your paycheck. Resubmit as often as you need, whenever you need.

Related Reading

•   When Should I Adjust My W-4 Withholdings? (Jackson Hewitt)

•   W-4 Form: How to Fill One Out in 2025 (Nerdwallet)

•   Why Your Tax Refund Is Nothing to Celebrate (Tax Foundation)

photo credit: iStock/hapabapa

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