Common Tax Mistake That Costs You: Understanding Your W-4
One of the most common tax mistakes adults make is not having the correct amount withheld—either too much or too little—which can lead to surprise tax bills, smaller refunds, or IRS penalties.
A little attention now can save you money and stress later.
The W-4: What It Actually Does
Whenever you begin a job, your employer requests a Form W-4. This form informs your employer of how much federal income tax to withhold from each paycheck. The more accurately you complete it, the more your withholding will align with your actual tax bill.
If too much is withheld, you could be owed a refund. While you’ve essentially lent money to the IRS without interest, you might find relief in not owing them.
If too little is withheld, you might owe money in April and face underpayment penalties, which is why some choose to overwithhold.
The goal is to achieve balance, not rely on guesswork or crossing your fingers.
How the W-4 Works
The newest version of Form W-4 no longer features “allowances.” Instead, it asks for basic information:
Personal information
Martial status
Whether you have more than one job or if your spouse works
Whether you have dependents and how many
Whether you want additional tax withheld
It’s meant to be easier than the previous version, but only if you fill it out honestly and thoroughly.
When You Have More Than One Job
Things become more complicated when you work multiple jobs or if both you and your spouse are employed. In these cases, the IRS recommends using its online withholding calculator or the worksheet included with the W-4 to estimate the total tax owed from all income.
You can then:
Split withholding adjustments between employers, or
Have one employer withhold the entire additional amount.
Mainly avoid submitting duplicate entries, such as the same dependents or adjustments multiple times across different W-4s.
Example: Not Withholding Enough
Imagine earning $36,000 from your main job and an extra $8,000 from a second job. If you fill out both W-4 forms as if each job were your only source of income, each employer will withhold too little. When tax season arrives, the IRS calculates your tax based on $44,000 in total income, and suddenly, you owe money because the two separate withholdings never matched your actual liability.
This is one of the most common reasons people unexpectedly find themselves owing money in April.
Update Your W-4 When Life Changes
Your tax situation changes as your life does. Update your W-4 when you:
Get married or divorced
Have a child
Start (or stop) a side hustle
Pick up a second job
Buy a home
Experience major income changes
You can submit a new W-4 at any time, not just when you start a new job.
Key Takeaway
Your W-4 is more crucial than most people think. Filling it out correctly and updating it when your life changes helps you avoid surprise tax bills and keeps more of your money working for you all year long.
Disclaimer: Creek & Lyells Financial Literacy Foundation does not provide financial services, nor does it recommend or advise visitors to open accounts or buy or sell securities. All content on this blog is for educational purposes only. While we strive to provide accurate, relevant, and well-vetted information, visitors should consult a licensed financial professional and carefully evaluate the risks of any financial decision before taking action.