It’s a calming thought: owing nothing on your federal tax return. And you can make it happen if you handle your withholding strategically. The W-4 form that you fill out for your employer when you start a new job determines how much income tax will be withheld from your paycheck and, ultimately, how much tax you will either owe or get back as a refund when you file your taxes.
What you may not know: It’s not a one-time thing. You can submit a revised W-4 form to your employer whenever you want. Managing how much your employer withholds through your W-4 form will give you a better shot at owing no taxes come April. You also should avoid having too much withheld, of course. That would be giving Uncle Sam an interest-free loan all year.
Here’s how to get your tax bill closer to zero before tax time arrives.
- The W-4 form you fill out for your employer determines how much tax is withheld from your paycheck throughout the year.
- An online calculator can help you estimate your tax liability for the year and determine whether you’re having too little or too much withheld.
- Once you know that, you can submit a new W-4 to get closer to owing nothing at tax time.
Estimate What You’ll Owe
If you're a salaried employee with a steady job, it’s relatively easy to calculate your tax liability for the year. You can predict what your total income will be.
Millions of Americans don’t fall into the above category. They freelance, have multiple jobs, work for an hourly rate, or depend on commissions, bonuses, or tips. If you’re one of them, then you’ll need to make an educated guess based on your earnings history and how your year has gone so far.
From there, there are several ways to get a good estimate of your tax liability.
1. Use an Online Calculator
There are a number of free paycheck and income tax calculators online. If you enter your gross pay, your pay frequency, your federal filing status, and other relevant information, the calculator will then tell you your federal tax liability per paycheck or per year.
This method is easy, and the result will be reasonably accurate—but it may not be perfect since your actual tax liability may depend on some other variables, such as whether you itemize deductions and which tax credits you claim.
2. Use a Tax Withholding Estimator
The tax withholding estimator on the Internal Revenue Service (IRS) website is particularly useful for people with more complex tax situations. This tool is more time-consuming than a simple calculator, but also more accurate.
It will ask about factors like your eligibility for child and dependent care tax credits, whether and how much you contribute to a tax-deferred retirement plan or Health Savings Account, and how much federal income tax you had withheld from your most recent paycheck.
Based on your answers, it will tell you your estimated tax obligation for the year, how much you will have paid through withholding by year’s end, and your expected overpayment or underpayment.
3. Fill Out a Sample Tax Return
Another option is to complete a sample tax return for the year, by either using tax software or downloading the forms you need from the IRS website and filling them out by hand.
This method should give you the most accurate picture of your annual tax liability, but will also take the most time.
If you’re using last year’s tax software or IRS forms, make sure that there haven’t been significant changes to the rules or the tax rates that would affect your situation.
How To Get The Most Money Back On Your Tax Return
Adjust Your Tax Withholding
Once you know the total you'll owe in federal taxes, the next step is figuring out how much you need to have withheld per pay period to reach—but not exceed—that target by Dec. 31.
Then, fill out a new W-4 form accordingly.
You don’t have to wait for your employer’s human resources department to hand you a new W-4 form. You can print one yourself from the IRS website.
If Your Employer Isn't Withholding Enough
The W-4 form has a place to indicate the amount of additional tax that you would like to have withheld each pay period.
If you’ve underpaid so far, subtract the amount that you’re on track to pay by the end of the year, at your current level of withholding, from the amount that you will owe in total. Then divide the result by the number of pay periods that remain in the year.
That will tell you how much extra you want to have withheld from each paycheck.
You could also decrease the number of withholding allowances that you claim, but the results won’t be as accurate.
If You’ve Been Overpaying
Unless you’re looking forward to a big refund, try increasing the number of withholding allowances that you claim on the W-4.
Deciding on the exact number can be tricky. A simple method is to plug different numbers of withholding allowances into a paycheck calculator until it hits the amount closest to the federal tax that you want to have withheld for each pay period going forward.
Note that the IRS requires that you have a reasonable basis for the withholding allowances that you claim. It doesn’t want you fiddling with its form just to avoid paying taxes until the last minute. It can fine you and impose criminal penalties for intentionally having too little withheld by providing incorrect information on your W-4. It can also require your employer to withhold the correct amount, taking the choice out of your hands.
If you don’t have enough tax withheld, then you could be subject to penalties.
You need to have enough tax withheld throughout the year to avoid underpayment penalties and interest. Underpayment penalties are separate from the lying penalties described above; they apply even if you've made an honest mistake.
You can avoid underpayment penalties by making sure that your withholding equals at least 90% of your current year’s tax liability or 100% of your previous year’s tax liability (110% if your AGI was $150,000 or more), whichever is smaller.
You’ll also avoid penalties if you owe less than $1,000 on your tax return.
Other Ways to Adjust Your W-4
If it’s so early in the year that you haven’t yet received any paychecks, you can just divide your total tax liability for the year that just ended by the number of paychecks that you receive in a year. Then, compare that amount to the amount that’s withheld from your first paycheck of the year once you get it and make any necessary adjustments from there.
If you adjust your W-4 to make up for any underpayment or overpayment partway through the year, then you’ll want to fill out a new W-4 in January. Otherwise, your withholding will be off for the new year.
Of course, if your income fluctuates unpredictably, this is all a lot harder. But following the steps above should help you get close to a reasonable number.
And remember: You can redo your W-4 several times during the year if necessary.