What Is Federal Tax Withholding?

We know just thinking about taxes can make you want to take a nap and not wake up till April’s over. (Same.) But like it or not, you’ve got to arm yourself with knowledge so you don’t end up in trouble with Uncle Sam (he can get a little cranky when it comes to his money) or overpay him all year. It all comes down to getting your federal tax withholding set up just right on the front end.

So, what’s the deal with federal tax withholding? Glad you asked! Let’s dive into what you need to know.

What Is Federal Tax Withholding?

Basically, federal tax withholding is where your employer takes a certain amount of money out of your paycheck for taxes and sends it to the federal government on your behalf.

The amount withheld from your paycheck depends on a couple things, including how much money you make and how you fill out your W-4. Why does this matter? Well, when tax season comes around and you finish filing, you’ll either get a refund or owe additional taxes. A lot of people think getting a nice juicy refund is like getting free money. Nope! All a big tax refund means is that you’ve been loaning Uncle Sam your hard-earned cash interest-free. All. Year. Long. Um, pass.

You want to go for the Goldilocks approach. Too much withheld and you’re giving Uncle Sam money without any interest. Too little withheld and you’ll end up owing the government money. You want your withholding to be just right so you break even when tax time rolls around. If you haven’t recently, check with your employer to make sure you’re having them hold back just enough to cover your tax obligations (we’ll show you how to do that below).

How Does Tax Withholding Work?

Here in the good ol’ U.S. of A., everyone who earns an income is supposed to pay income tax to the federal government (and your state if you live in one with a separate income tax).

When you start a new job—or have a major life change, like getting married or having kids—you’ll need to fill out a W-4 form. This form tells your new employer how much money to take out of your paycheck for taxes.

How to Fill Out a W-4

Filling out a W-4 is nothing to stress about. There are basically five steps, or sections, you’ll need to complete. While some of these steps might not apply to you right now, it’s still good to know what each section means in case you need to make changes later.

Here’s what you’ll fill out:

• Step 1: Write down your personal information. Fill in your name, address, Social Security number, and expected filing status (single, married filing jointly, married filing separately, or head of household).
• Step 2: Note if you have multiple jobs or a working spouse. Additional income from a working spouse, second job or side hustle can affect how much you should withhold. Follow the directions on this step to make sure you’re not withholding more or less than you need.
• Step 3: Claim dependents and other credits. This is where you’ll claim your dependent tax credits to reduce your withholding and keep more money in your paycheck. (Thank you, child tax credit!)
• Step 4: Make other adjustments. Here’s where you can adjust your withholding for income not from jobs (like investment income), deductions other than the standard deduction, or extra money you’d like withheld for taxes.
• Step 5: Add your signature. Sign it. Date it. And voilà! Once your John Hancock’s on that dotted line, you’re done filling out your W-4.

Remember, you don’t want too much taken out of your paycheck—just enough to appease your favorite Uncle Sam.

How to Determine Your Federal Tax Withholding

Getting your W-4 just right is easier than you might think. You can figure out the right amount of tax withholding a few different ways.

Do a mock tax return.

The first way—if you want to be super thorough—is to do a mock tax return. That’ll show exactly what you owe for the year. If you get paid every two weeks, divide that tax bill by 26 (divide by 24 if you get paid twice a month), and you’ll have the amount of tax that needs to come out of each paycheck—assuming your income stays the same all year.

Review any major life changes.

Another way is to take a look at the last year and see if there’ve been any major changes in your life. Did you buy a home, have a baby, get married? Things like that will affect your tax bill, so you should update your W-4 right away so your withholding is as spot-on as possible.

If you got one, take a look at your tax refund (or tax bill).

Let’s say you didn’t have any major changes last year and for the last few years you’ve had a $3,000 refund. You’d want to adjust your W-4 so you don’t get a refund. Why? Because that $3,000 refund comes out to an extra $250 in your pocket each month. Think that could make a big difference in your monthly budget or your debt snowball? Heck yes!

How to Check and Change Your W-4

Alright—so you figured out you need to make some adjustments to get your withholding set up just right (remember, Goldilocks style). The next step is to get a copy of your current W-4.

Don’t settle for tax software with hidden fees or agendas. Use one that’s on your side—Ramsey SmartTax.

Luckily, it’s pretty easy to get ahold of your W-4. Reach out to your payroll department (or whoever else handles payroll at your job)—they should have it on file. If your job uses an online payroll service, you might be able to log in and take a peek at your W-4 that way.

After looking it over and deciding what to adjust, you can download and fill out a revised W-4 form from the IRS website to give to your employer.¹ You can change your W-4 whenever you want, so there’s really no reason to put off any adjustments after a major life change.

If you’ve still got questions or you have a complicated tax situation, connect with a tax pro to help you get the adjustments right.

Do Taxes the Right Way

Okay, we know. That’s a lot to keep in mind—and yes, there’s some math involved. But you don’t have to dig through the numbers alone! If you got a big refund or tax bill last year and just can’t figure out why, ask a RamseyTrusted tax pro for help. They can make sense of your personal tax situation and guide you toward getting your W-4 right on the money (literally) so you can win with taxes.

Find a tax pro today!

Got your withholding right and have a simple tax return? Check out Ramsey SmartTax. It’s easy-to-navigate tax software that’s affordable, so you can file your return with confidence. No hidden fees, no advertisements, no games. That’s how it should be.