Why Your Paycheck May Not Have Enough Taxes Taken Out (and How to Fix It Before Tax Time)

I hope everyone has enjoyed the holidays. As we approach this time of year, this is when we need to prepare for the coming year. If there were any changes in your life, how would that affect the federal taxes you have coming out of your W-2? Is the correct amount of taxes being withheld? This is something I see every year, the W-4 you completed when you started your job may be incorrect or may not have been updated since then.

In 2017, when the Tax Cut and Jobs Act (TCJA) was signed into law it changed the tax brackets and the W-4 you complete when you start a new job. The first question to ask is: Have you filled out a new W-4 since 2018? If yes, then we need to look at how it was filled out. This is important because this form directly affects how much federal tax is taken out of your paycheck.

Here is what you need to know about form W-4:

Step 1: Enter Personal Information

This step is basic, enter your name, Social Security number, address and your filing status (Single, Married Filing Jointly (MFJ), or Married Filing Separately (MFS)) If you normally file MFJ, you may choose to check ‘Single’ or ‘Married Filing Separately’ to increase withholding. This can help avoid owing when you file.

Step 2: Multiple Jobs or Spouse Works

This is the most commonly missed step. When your taxes are calculated your employer only knows about the job you have with them. They do not know about your spouse’s income, your side job, or if you had another job prior to your current employer, during the same tax year.

Because of this, each job withholds taxes as if it is your only job. Even if you do not work both jobs at the same time, Step 2 still matters if you have more than one job in the same tax year. Each employer withholds as if they are the only one.

This is why people are often shocked at tax time. The system did not have enough information to withhold correctly. Step 2 tells the system that there is more than one job or more than one income in your household. It helps adjust withholding, so the correct amount of tax is paid throughout the year instead of all at once when you file your return.

You should pay special attention to Step 2 if any of the following applies to you or your family:

• You work more than one job at the same time
• You change jobs during the year
• Your spouse works
• Your teenager works multiple part‑time or seasonal jobs throughout the year (their withholding may be too low if the second job does not have that box checked)

Step 3: Claim Dependent and Other Credits

If you do not have any dependents, skip this step.

If you do, complete this based on the age of the dependents and your household income.

If total household income is over $200,000 (Single/MFS) or $400,000 (MFJ), the credit phases out, so this step may not apply.

If income is below those amounts:

• Children under age 17: $2,200 each
• Dependents age 17 or older: $500 each

Add those together and enter the total in Step 3.

Important:

The year your 16-year-old turns 17, the Child Tax Credit drops from $2,200 to $500 on January 1st. If both spouses work, both employers should receive an updated W-4 at the beginning of that year. This change alone can reduce your refund or cause you to owe

Step 4: Other Adjustments

Use this section only if you need to adjust withholding further.

4(a) Other Income (not from jobs)

This is for income that does not already have taxes taken out, such as:

• Interest
• Dividends
• Retirement income
• Side gigs or 1099 income (small amounts)
• A little extra income on the side

Adding a total amount here helps make sure you do not end up owing money when you file your tax return, since none of that income had taxes withheld during the year.

4(b) Deductions

This is for people who will claim more than the standard deduction on their tax return. If you check this box, it reduces the taxes taken out of each paycheck because the form assumes you will get a bigger deduction at tax time.

4(c) Extra Money You Want Withheld Each Paycheck

This is where you tell your employer: “Take out an extra $___ from every paycheck.” If you’d rather pay a little extra now than owe later, put an amount in 4(c). If you owed last year and nothing else changed, Step 4(c) is often the quickest fix.

As we enter the new year, it is a good time to look at your current W-4 and make sure it still matches your life, income, and family situation. Jobs change. Kids get older. Incomes go up or down. All those things can shift how much tax should be withheld from your paycheck.

If you are unsure where to start, or if something here sounds like it might apply to you, please reach out. I am happy to review your W-4 with you, answer questions, and help you avoid surprises at tax time. A few minutes now can save stress later.

As always, thank you for trusting me with your tax and financial guidance. My goal is to help you feel confident, prepared, and never surprised at tax time.

Happy New Year from the Denise Calderon CPA Team!