The IRS received 162,037,000 individual income tax returns in 2022. On a personal level, the amount of tax you pay – and withhold along the way – can have a big effect on your finances at filing time. One document can make a big difference: your W-4. 

In the run-up to April 15 – this year’s deadline for your 2023 income taxes – Americans surround themselves with paystubs, receipts and statements from financial institutions. Before you take on spring cleaning and file your records away, there’s one more thing you can do with them – with the added benefit of setting the stage for next year’s tax filing. 

You may be familiar with the W-4 tax form as one of the key pieces of starting a new job, but you’re able to adjust it with your employer at any time. 

Officially known by the IRS as “Employee’s Withholding Certificate,” this important tax document gives employers the information they need to withhold taxes from each of your paychecks. It’s your responsibility as the employee to provide the most accurate details. A miscalculation could cost you when tax time rolls around, and errors could mean the difference between getting a refund and owing taxes (and possible penalties). 

Completing the W-4 form 

The paperwork you’ve already been referring to for this year’s taxes can help guide you in completing the W-4. If you have a spouse, you’ll need access to their work details as well. You’ll also provide your tax filing status and other personal information to identify yourself. 

Where the W-4 form’s calculations can get tricky is getting a full picture of your taxable income situation. The IRS has a tax withholding estimator where you can model out your scenario and see possible adjustments in real time. 

It’s like a rough draft for your W-4, and any changes you scope out also reflect the differences you may see in your take-home pay, amount of tax due, and any potential refund. You’ll need to have paystubs (for all your jobs and a spouse’s) and information on any additional income you collect (interest on investments, real estate, self-employment, capital gains, side gigs), along with your most recent tax return. Bonuses and equity compensation should also be taken into account. 

Once you’re settled on the income side, there are two additional layers to the W-4 form you may wish to consider.  If you’re eligible for tax credits for because of qualifying children or other dependents you claim on your return, or if you qualify for other available tax credits, you may consider adjusting your withholding instructions to account for the impact of those credits. There’s also the option to further customize your withholdings if you prefer to have extra tax withheld or if you anticipate claiming additional deductions at tax time. The W-4 presumes that when you file your taxes, you’re taking the standard deduction. Getting an early estimate now of what you plan to deduct can help you determine if you wish to make further adjustments on this form.  

It may feel like a lot of work to crunch so many numbers to prepare one form but remember that the more accurate you are with your information, the more accurate your withholding will be. 

Why the W-4 is important 

If your withholdings fail to keep pace with your tax liability throughout the year, you may be in for an unwelcome surprise in the form of underpayment penalty assessments in addition to your tax bill. 

The W-4 form can help you stay on track, since money to cover taxes is withheld throughout the year with each paycheck. An alternative (or an add-on) to year-round withholding is making quarterly (or even more frequent) payments to the IRS itself, in what’s called estimated taxes.  

The balancing act here is that ideally, the amount of tax you pay during the year (through whichever vehicle you choose) is close to your tax bill. If there’s too big a gap, you could be on the hook for paying the difference all at once, plus a penalty if the balance due is $1,000 or more after accounting for withholding and credits. 

As a result of higher interest rates, the IRS now charges 8% interest on estimated tax underpayments, which is an uptick from the 3% it was charging previously.¹ 

Plan ahead now 

The W-4 form may seem daunting at first, but carving out time to get your tax withholdings in a good place now can keep you steady with your taxes as the seasons change.