Tax Withholding

Tax Withholding Estimator

Among the tools the Internal Revenue Service provides to taxpayers to fulfill their tax obligations, the tax withholding estimator stands out as being one of the most accurate and useful tools. Taxpayers who are working for an employer or earning an income that’s subject to federal income tax withholding can use it to estimate the total tax liability and taxes paid at the end of the year. Also known as the tax calculator, the tax withholding estimator works as a questionnaire that sums up your tax outcome for the year-end. It’s a powerful tool of the IRS that will point out where you’re doing right and wrong.

We suggest using the tax withholding estimator a couple of times during the tax year so you know the direction you’re headed with the taxes. Make sure to use the tax withholding estimator properly though as it might lead to withholding more or less tax than necessary. In this article, we will explain how to use the tax withholding estimator, what to do once the results are shown, and how to get the best out of it.

How to use the tax withholding estimator?

The tax withholding estimator is made up of five different parts. In each section, you will provide information about yourself, income, and taxes. The sections are titled as:

  1. About You
  2. Income and Withholding
  3. Adjustments
  4. Deductions
  5. Credits

The information provided about the above will determine whether or not you’re going to get a refund or owe taxes to the IRS. One thing we want to point out is that do not use the most recent information. Instead, enter the information such as money amounts shown on your Form W-4, Employee’s Withholding Certificate or W-4P, Withholding Certificate for Pension or Annuity Payments. The reason for this is to make sure the outcome is as accurate as possible.

If the results are not looking good – for example, if you owe too much in taxes or paying more than you should, fill out a new Form W-4 to adjust the amount of federal income taxes withheld. Here is what you need to know about every part of the tax withholding calculator.

About You

In the first part of the tax withholding estimator, you will enter information about yourself such as filing status, dependency, types of income earned, and benefits received.

Income and Withholding

Enter the total amount of income you expect to earn pre-tax and select whether or not all of this income is subject to federal income tax withholding. This part is very important as it will determine a majority of your tax liability as it has a direct impact on the taxes paid.

Adjustments to Income

Enter the adjustments you can claim on Schedule 1, Additional Income and Adjustments to Income. You will get to your adjusted gross income while reducing taxable income at the end of this part. 

Tax Deductions

Moving on with the deductions, if you’re anticipated to claim the standard deduction and be done with the deductions, select it so. If not, enter the itemized deductions in total to figure out your taxable income which you’ll be taxed at. 

Tax Credits

The last and perhaps the most important part of the tax withholding estimator, enter the tax credits you anticipate to claim. The tax credits work as reducing your tax liability so they are very important. Do not miss any of them on the tax withholding estimator as well as on your federal income tax return. They are much more valuable than tax deductions as they cut the tax owed directly.

Making the federal income tax withheld right

The federal income tax withholding is mandatory for the majority of taxpayers. If you’re earning income through employment, your employer will withhold taxes from your income and forward it to the IRS on your behalf. This is pretty much how you pay your federal income tax. The total amount of taxes withheld might not be sufficient enough to pay off your total tax liability though. That’s when you’re expected to pay the IRS directly to pay off your tax liability entirely. This isn’t the outcome for most taxpayers though as getting a tax refund from the IRS is more likely.

The best thing a taxpayer can do to adjust the federal income taxes withheld from their income every paycheck is to enter the most correct and recent information on Form W-4. There are plenty of reasons as to when you should file a new W-4 and furnish a copy to your employer. This includes but not limited to changes to filing status such as getting married or divorced, picking up a second or third job, having a child, becoming eligible for deductions that will make a significant impact on your taxable income, etc. 

The bottom line is anything that will have a direct impact on your federal income tax return that can be reported on the W-4 should be enough of a reason to file a new copy.

Fill out 2021 Form W-4

There are several ways Form W-4 can be filed to let your employer know about your taxes so that the federal income tax withheld is adjusted accurately. The easiest way to fill out a Form W-4 is to complete the form on your computer, then print out a paper copy or save it as a PDF to e-mail to your boss or the payroll department of the company.

The IRS released Form W-4 is fillable online so you don’t need to print it out to complete one. This is a lot better especially considering the readability aspect of the document. After your employer receives the new W-4, the new federal income tax withholding based on the new form will take effect on the next paycheck.

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