IRS announces new tool for taxpayers to get paycheck withholding right: the Tax Withholding Estimator

The 2023 tax season has ended for most filers in the United States, and the IRS is already preparing for 2024.

On 18 April, the tax authority announced that filers can “use the IRS Tax Withholding Estimator to help update the amount of tax to have taken out of their 2023 pay.” While some may think that making such a calculation is a job for next year, the IRS disagrees and encourages workers to be proactive.

What does the Tax Withholding Estimator do?

Each month your employer withholds a portion of your pay and sends that money to the IRS. However, in some cases, some of that money is returned. For instance, say each month your employer withholds twenty percent of your pay, which adds up to $10,000, which, if you worked an entire year, would be the amount owed to the IRS based on your income. Now, consider if you only worked for six months of the year. Your income will be smaller than it would have been if you worked the full twelve months, meaning you will probably owe less to the IRS and be returned some of the portion equivalent to your income for that year.

Make sure the IRS has all the most up-to-date information

Your employer knows how much to withhold from your paycheck based on the information provided on your W-4, which is when one selects their filing status (i.e., single, married filing jointly, head of household) and reports the number of dependents in their care. If this information changes, another W-4 needs to be submitted, and using the Estimator is designed to help taxpayers determine if an update is needed. A surprise tax bill can be completely avoided by using this tool to ensure the IRS has the most up-to-date financial information.

For self-employed workers, including those on Social Security, the tool can be used to determine how much they should be withholding and paying to the IRS.