Getting a large tax refund can feel like good news. Getting an unexpected tax bill definitely doesn’t.

But ideally, your federal income tax withholding should come reasonably close to the amount of tax you actually owe. The Tax Withholding Estimator from the IRS can help you see whether you’re on track before tax season arrives.

Federal income taxes generally operate on a pay-as-you-go system. For employees, that usually means taxes are withheld from each paycheck throughout the year. If too little is withheld, you could face a tax bill—and potentially an underpayment penalty. If too much is withheld, you’re giving up the use of that money during the year and waiting to receive it back as a refund.

That’s why checking your withholding before the end of the year can be a smart tax-planning move.

What Is the IRS Tax Withholding Estimator?

The Tax Withholding Estimator is a free online IRS tool designed to help workers and retirees estimate the appropriate amount of federal income tax to have withheld.

The tool compares your projected tax liability with the amount you’re currently having withheld. Based on the information you provide, it can show how your current withholding could affect your expected refund, take-home pay, or potential balance due.

The IRS says the estimator generally takes about 25 minutes to complete, although taxpayers with simpler situations may finish more quickly.

Why Check Your Tax Withholding During the Year?

A withholding problem is much easier to address when there are still paychecks remaining in the year.

If you discover that too little federal income tax is being withheld, you may be able to increase withholding for your remaining pay periods. If too much is being withheld, an adjustment could potentially increase your take-home pay instead of having you wait until tax season to receive the excess as a refund.

The IRS specifically recommends checking withholding after major financial or personal changes, including:

• Starting or leaving a job
• Adding a second job
• A significant change in income
• Marriage, divorce, or separation
• Birth or adoption of a child
• Purchasing a home
• Changes in deductions or tax credits

Changes involving investment income, self-employment income, retirement distributions, bonuses, or other income can also affect your overall tax picture.

What Do You Need for the Tax Withholding Estimator?

Before using the Tax Withholding Estimator, gather your most recent paystubs.

If you’re married and expect to file jointly, you’ll generally want your spouse’s current pay information as well.

Depending on your situation, you may also need your most recent federal income tax return and information about other income, deductions, credits, self-employment income, or itemized expenses.

The IRS says the estimator does not ask for identifying information such as your name, Social Security number, address, or bank account numbers. Information entered into the tool isn’t saved or shared with the IRS, and responses are cleared when you close the browser.

What Happens If Too Little Tax Is Withheld?

Having too little withheld can result in more than an unpleasant surprise at tax time.

Because federal income tax is generally pay-as-you-go, taxpayers are expected to pay sufficient tax throughout the year through withholding, estimated tax payments, or a combination of the two.

Generally, most taxpayers can avoid an underpayment penalty if they owe less than $1,000 after subtracting withholding and refundable credits, or if they paid at least 90% of the current year’s tax or 100% of the tax shown on the previous year’s return, whichever is smaller. Different rules can apply in certain situations, including for some higher-income taxpayers.

That makes checking your withholding about more than controlling the size of your refund. It can also help identify a potential tax shortfall while there’s still time to address it.

What If Too Much Tax Is Being Withheld?

Too much withholding creates a different problem.

You may receive a larger refund after filing, but that generally means you didn’t have access to some of your own money during the year.

The IRS recommends trying to have withholding reasonably match your actual tax liability. If too much is withheld, you’re effectively waiting until your refund arrives to regain access to the excess.

Some taxpayers intentionally prefer a larger refund, and that’s a personal financial choice. But understanding your withholding gives you the information needed to make that choice deliberately rather than discovering the result at tax time.

How Do You Change Your Tax Withholding?

If the Tax Withholding Estimator indicates that an adjustment may be appropriate, you can use the results to help complete a new Form W-4.

The updated Form W-4 can then be submitted to your employer or through your employer’s payroll or human resources system. Pension and annuity recipients may instead use Form W-4P when applicable.

The IRS notes that making an adjustment earlier gives you more remaining pay periods over which the change can take effect. Waiting until very late in the year can require a larger adjustment per paycheck to achieve the same result.

Who Should Pay Particular Attention to Withholding?

Checking withholding can be especially useful if your financial situation isn’t as simple as one job and one source of income.

Households with two working spouses, people with multiple jobs, taxpayers who receive bonuses or commissions, retirees with pension income, and people who also earn investment or self-employment income may have additional factors affecting their tax liability.

Self-employed taxpayers should also remember that withholding isn’t the only way taxes may need to be paid during the year. Individuals who don’t have enough tax withheld may need to make estimated tax payments instead.

A more detailed list of when and how to edit your withholdings is described in our post Why You Should update Your W4 After Major Life Events

Tax Withholding Estimator: The Bottom Line

You don’t have to wait until tax season to discover whether you’ve been withholding too much or too little.

The IRS Tax Withholding Estimator gives you an opportunity to review your situation while you may still have time to make adjustments.

Gather your most recent pay information, review your income and tax situation, and see where you’re currently headed.

The goal isn’t necessarily to receive the biggest possible refund. It’s to avoid an unexpected tax bill while keeping your withholding reasonably aligned with what you actually expect to owe.

At Cheshier Tax Resolution, we encourage taxpayers to address potential tax issues proactively whenever possible. Reviewing your withholding during the year is one relatively simple step that can help prevent an unwelcome surprise when it’s time to file.

Frequently Asked Questions

What is the Tax Withholding Estimator?

The Tax Withholding Estimator is a free IRS tool that helps eligible workers and retirees estimate how much federal income tax should be withheld from their wages, pensions, or annuities.

When should I check my tax withholding?

The IRS recommends checking it every January and again after significant changes involving employment, income, marriage, divorce, children, a home purchase, deductions, credits, or other circumstances that could affect your taxes.

Can the Tax Withholding Estimator change my withholding?

No. The estimator provides results that can help you determine whether an adjustment is appropriate. You generally make the actual change by submitting a new Form W-4 to your employer.

Is getting a large tax refund better?

Not necessarily. A large refund can mean more tax was withheld during the year than was ultimately needed. The IRS recommends trying to have withholding match your actual tax liability as closely as practical.

Can checking my withholding help prevent a tax bill?

Yes. Reviewing withholding can identify whether you’re on track to have too little tax withheld, giving you an opportunity to make an adjustment before filing season. It cannot guarantee that you won’t owe because your actual tax situation can change.

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