Tax withholding estimator

Withholding and liability are two different numbers

Your liability is what you owe for the year: brackets applied to taxable income, credits subtracted, one figure settled on the return. Withholding is what your employer sends the IRS each payday, estimated in advance from a table. They are almost never equal, and the difference is your refund or your bill.

On $85,000 single, the liability is $9,870 of federal income tax — $380 a fortnight if it were spread perfectly across 26 paychecks. Withholding aims at that figure and misses in a direction determined entirely by what is on your W-4.

Employers cannot know your liability. They know what you told them on the form and what they are paying you, and the table assumes this pay period repeats unchanged for the whole year. Everything that breaks that assumption — a mid-year start, a bonus, a second job, a spouse's income, freelance income on the side, a raise in July — pushes the two apart.

Which direction it goes is predictable from the cause. Under-withholding comes from income the employer does not know about: a second job, a spouse, self-employment, investment income. Over-withholding comes from the reverse: a mid-year start, a year with unpaid leave, or a W-4 completed defensively years ago and never revisited.

Neither is a mistake being made by anyone. The system is a series of estimates settled once a year, and the only question worth asking is whether you would rather have the money now or in April.

When to use the IRS tool instead of this one

The IRS Tax Withholding Estimator is the authoritative tool for setting a W-4 and we would rather send you to it than pretend otherwise. It is free, it carries no advertising, and its output maps directly onto the form's numbered steps.

It is genuinely better than this in three specific cases. A mid-year start or change, because it works from year-to-date figures on your payslip and can tell you what the remaining paychecks should withhold rather than what a full year would need. A household with several income sources — two jobs, a pension, Social Security, self-employment alongside a salary — which it models properly. And any year where something unusual has already happened, because it can account for what has been withheld so far.

Where it is weaker is scope and effort. It works from net rather than gross, it asks for figures most people have to go and find, it takes ten to fifteen minutes and cannot easily be abandoned half-way — and it does not model state or local income tax at all.

That last one is the gap this fills. State tax on $85,000 ranges from nothing to $6,604 depending on where you live, and eleven states let a city or county levy income tax on top — 3,672 such jurisdictions are modelled here. A federal-only withholding answer is complete about federal and silent about a line that can be larger.

So the honest division: this one for a quick annual check on whether you are roughly on track and what the state layer adds, the IRS estimator when you are about to actually fill in the form. They are not competing for the same moment.

The W-4, step by step

The form was rewritten in 2020 and no longer uses allowances. Anyone working from advice about "claiming zero" or "claiming two" is describing a form that has not existed for six years. It now asks for dollars and for facts about your household, and converts those into a withholding amount directly.

Step 1 is identity and filing status, and the status here should match the one you will actually file under. Selecting single when you will file jointly withholds too much; the reverse withholds too little.

Step 2 handles multiple jobs and is where most under-withholding originates. Each employer withholds as though its salary were your only income, applying the standard deduction of $16,100 and the lowest brackets to its own payments. With two jobs both do it, so the deduction and the low brackets get used twice and the shortfall arrives in April. The checkbox in 2(c) is the simplest fix where two jobs pay similarly; the worksheet is more accurate where they do not.

Step 3 claims dependants as dollars of credit rather than as allowances — the child tax credit and the credit for other dependants, entered directly. Step 4(a) is other income nothing withholds against, such as interest, dividends or self-employment. Step 4(b) is deductions above the standard amount, for people who itemise.

Step 4(c) is the blunt instrument and the most reliable one: an extra dollar amount per pay period. If last year produced a bill of $1,300 and nothing has changed, $50 here on a fortnightly schedule closes it exactly. It moves the number directly rather than moving an input to a table, which is why it is the fix we would reach for first.

Whether a big refund is a problem

A refund is your own money returning without interest after being held for up to sixteen months. On $85,000 a $3,000 refund means over-withholding by about $115 every fortnight all year — roughly $60 of foregone interest at modest rates, which is real but not enormous.

Plenty of people know this and choose it anyway, and they are not being irrational. Money that never arrives cannot be spent, and a lump sum in spring is how a good many households fund a specific thing they would otherwise struggle to save for. Forced saving with a poor return is still saving.

The case against is stronger for anyone carrying expensive debt. Lending the government $3,000 at zero while paying 20% on a card balance costs several hundred dollars a year in a way that is invisible because it never appears as a charge.

A bill in April is the mirror image and is not automatically a problem either. The safe harbour generally protects you if withholding covered at least 90% of this year's tax or 100% of last year's — 110.00000000000001% where the prior year's AGI exceeded $150,000. Inside that, owing money means you kept it longer.

The position to avoid is the unplanned one: a large bill that arrives as a surprise, in a month when the money is committed elsewhere. The whole point of checking mid-year is that a shortfall found in July is $100 a fortnight for the rest of the year, and the same shortfall found in April is a single payment.

The events that should trigger a new W-4

You can file a new W-4 whenever you like and as often as you like. The events that reliably justify one are predictable: marriage or divorce, a birth or adoption, a second job starting or ending, a spouse's job changing, a large bonus, buying a house if it moves you into itemising, and a year that ended with a surprise in either direction.

Timing matters more than people realise, because withholding corrects from the filing date forward and not retroactively. A change made in January has twelve months to work; the same change made in November has two, so closing the same gap requires six times the per-paycheck adjustment.

The one that catches high earners is the Social Security ceiling. Above $184,500 of wages the 6.20% stops for the rest of the year, so late paychecks are larger than early ones with no change to anything. It is not a withholding error and needs no correction — but it makes a December payslip a bad basis for estimating an annual figure.

The one that catches households is a spouse starting work mid-year. Both employers now withhold as though their salary were the only income, and because the change happened in July the shortfall builds for only half a year — which makes it small enough to miss and large enough to notice in April.

And bonuses. Supplemental wages are commonly withheld at a flat 22.00%, which over-withholds for someone in the 12.00% bracket and under-withholds above 22.00%. Neither changes what you owe; both change what you see, and a large bonus is worth re-checking the annual position after.

The state form nobody remembers to file

Getting the federal W-4 right and leaving the state form at its default is one of the commonest ways to end up correctly withheld federally and wrong at state level — and because the state bill is smaller, the error tends to persist for years before anyone notices.

States do not share a form. Several accept the federal W-4, several publish their own with different questions, and a few require a separate election for any additional amount. Some let you claim exemptions the federal form abolished in 2020, which means an employee filling in both can be answering contradictory questions on the same day.

The size of what is at stake varies enormously. In the 9 states with no income tax there is nothing to withhold and no form to worry about. At the other end the state takes $6,604 on this salary, which is worth as much attention as the federal line.

Then the local layer, which almost nothing models and which is withheld by the employer in eleven states. We have loaded 3,672 local jurisdictions across 7 states. Where you live and where you work can both matter and the rule differs: Michigan taxes non-residents at exactly half the resident rate, Ohio municipalities tax where the work is performed with a credit at home that is sometimes partial, and Indiana fixes your county as of 1 January.

The practical check takes one payslip. Find the state line, multiply by your number of pay periods, and compare it against what the state page here says you owe on your salary. If those two are far apart, the state form is where to look.

Five ways this check goes wrong

Counting FICA as withheld income tax. Boxes 4 and 6 are Social Security and Medicare — $6,503 on this salary. They are not prepayments of income tax and never come back. Only the federal income tax line belongs in this comparison.

Estimating from a single payslip mid-year. A fortnight multiplied by 26 misses every bonus, raise, unpaid week and benefit change, and if the payslip is from after the Social Security ceiling was reached, it misses that too.

Using gross where the tool wants taxable wages. Pre-tax deductions — 401(k), HSA, health premiums — come out before federal income tax is computed. Feeding gross into a field expecting the post-deduction figure overstates the liability by the size of those deductions times your marginal rate.

Forgetting the second income. The single largest cause of an April bill, and the one Step 2 of the W-4 exists to solve. Two jobs each applying the standard deduction is a $16,100 error before anything else.

Fixing it with an estimated payment instead of the W-4. Both settle the debt, but withholding is treated as paid evenly across the year regardless of when it happened, while an estimated payment is credited when made. For an underpayment discovered late in the year, the W-4 is strictly better.

The situations withholding tables handle worst

The table assumes this pay period repeats unchanged for a full year. Every case below breaks that assumption, and each breaks it in a predictable direction.

A mid-year start over-withholds, sometimes substantially, because the table annualises a partial year's earnings. Someone starting in July on a salary is withheld as though they earned that salary for twelve months, and the refund the following spring is the correction.

Irregular income under-withholds or over-withholds by turns. Commission-based pay, seasonal work, variable hours: each period is annualised as though it were typical, so a strong month withholds too much and a weak one too little. It roughly averages out, and "roughly" can be thousands by December.

Income with no employer behind it — freelance work, investment income, rental income, a pension with withholding declined — is invisible to the table entirely. The response is either estimated payments or, better where a salary exists, extra withholding on Step 4(c), which is treated as paid evenly across the year.

And two jobs is the structural one, because neither employer is doing anything wrong. Each applies the standard deduction and the lowest brackets to its own payments, so both are individually correct and jointly wrong by a predictable amount. Step 2 exists for exactly this and is the step most often left blank.

The mid-year check that takes ten minutes

The best time to look at withholding is around June, when there is still half a year to correct anything and the year-to-date figures are large enough to be meaningful.

Take the year-to-date federal income tax withheld from a payslip. Divide by the number of pay periods elapsed, multiply by your total periods for the year, and you have the projected annual withholding. Compare that against the liability this calculator produces for your salary.

If the gap is small, stop — withholding is never exact and a few hundred dollars either way is the system working. If it is large, divide it by the pay periods remaining, and that is the Step 4(c) figure that closes it before December.

The same check catches the errors nothing else would: a payroll system that never applied a W-4 you submitted, a status set wrong when you joined, or a state form left at a default that does not match the federal one. All three are common, all three persist silently for years, and all three show up immediately in this comparison.

Do it again after anything significant happens — a bonus, a raise, a change in the household, a second job starting. Each of those moves the number, and each is far cheaper to correct in the month it happens than in April.

Questions

How do I know if my withholding is right?

Take the federal income tax figure from a payslip, multiply by your number of pay periods, and compare it against your annual liability — on $85,000 single that is $9,870. Inside a few hundred dollars either way, it is working as intended. Outside that, the gap divided by your remaining paychecks is what to put on Step 4(c) of the W-4.

What should I put on my W-4 to break even?

There is no single answer, because it depends on your household rather than on your salary. The reliable method is Step 4(c): work out the gap between what you owe and what is being withheld, divide by the number of pay periods left in the year, and enter that as extra withholding. If you are over-withholding instead, the fix is usually completing Step 3 or Step 4(b) accurately rather than trying to enter a negative number.

Why do I owe money when my employer withholds tax?

Almost always because of income your employer does not know about: a second job, a spouse's salary, self-employment or investment income. Each employer withholds as though its own payments were your only income, applying the standard deduction and the lowest brackets separately. Combined, both have been used twice, and the shortfall lands in April. Step 2 of the W-4 exists for exactly this.

Should I use this or the IRS Tax Withholding Estimator?

For actually filling in the W-4, the IRS tool — it is authoritative, free, handles year-to-date figures for a mid-year change, and its output maps onto the form. Use this for a quick annual check and for the state and local layer, which the IRS tool does not model at all.

Is a big tax refund bad?

It is an interest-free loan to the government of your own money, and whether that matters depends on what else you would do with it. Some people want it as forced saving, which is a legitimate choice. If you are carrying credit card debt it is an expensive one — a $3,000 refund on this salary is about $115 a fortnight you could have had all year.

How often can I change my W-4?

As often as you like. Employers must apply a new one within a short period of receiving it. Withholding corrects going forward and not retroactively, so a change made early in the year does far more work than the same change made in November — which is why the useful time to check is mid-year, not at filing.