Extremely Long Screed on Withholding

Extremely Long Screed on Withholding

Ok, I have been meaning to dive into this for a long time, but have been dragging my feet because it is just technical and hard to explain.  But I have had so many clients ask me about how to fix their withholding when they owe at tax time.  And it seems like more and more people are owing.

But you know the expression, “Just tell me what time it is, I don’t need you to make me a watch”?  Well I am going to do some watchmaking.

The first thing you need to know is that our tax system is a “pay as you go” system.  You owe tax on your income as soon as you earn it.  That is why employers are required to withhold a portion of your income from your paycheck, and submit it to the IRS on a regular basis.  How much to withhold is the problem, and to make that determination we have the W-4.

If you have ever worked what I call “a real job” you had to fill out a W-4.  The form gets your name and address and SSN, and gets a little more information.  That information is used in a complicated calculation to determine how much of your income to withhold for tax.

Why do we have to do a calculation at all?  Because not all of your income is taxable.  Everyone gets something “deducted” from their income before it is taxed.  You might get the standard deduction, which everyone gets, or maybe you can claim a larger deduction because some of your expenses are higher.  When you fill out the W-4 you are providing the information for that calculation of how much to withhold.

For just a second, let’s pretend it is still 2017.  Not only could you deduct some stuff from your income, you also could claim “exemptions”, which is essentially a set amount money for each person in your household.    So if it is just you you are only going to have one exemption, but if you are married and have a pile of kids you may have 4 or 5 or 6 exemptions.

Prior to 2018 when you filled out the W-4 there was a line item for the number of exemptions, also called allowances, you were claiming.  Easy, right?  And then on the bottom or a second page was a worksheet where you could plug in all kinds of other stuff to determine your deductions, and you would get a number for that and add that to front of the form.  So you were reporting both your exemptions and deductions, and that information was plugged into the big calculation for how much to withhold from your pay.

So here’s the thing.  The exemption part was easy, but the deduction part wasn’t.  So we all learned a shortcut, which is if you want less withheld from your pay, you increase your exemptions.  If you want more withheld from your pay, you decrease exemptions.   For years my husband had his withholding set at “Married 0” (which should sound really familiar to a lot of you) despite the fact that we itemized our deductions and had four kids.  We got huge refunds.  On the other hand I once saw a single man who took the standard deduction with no children, but he claimed “Married 9”.  He owed a tremendous amount of tax every year.

The W-4 form stayed pretty much the same for decades.  The oldest one I could find was from 1990 and all that really changed was the font.  So we all knew how it worked.  And to be honest I think that complicated calculation I keep referencing was slowly getting skewed to withhold just a little more than needed, but no one really cared and it meant that in general most people with simple tax situations got refunds.

Ok.  The next piece of the watch I need to build is to tell you this:  The IRS doesn’t want to give you a refund.  But hey, they don’t want you to have to pay tax either.  The closer to $0 your return is, the happier the IRS is.  In its ideal world your W-4 allows for a perfect withholding of your tax due.  That pretty much never happens, but that’s the goal.

SO let’s go back to 2017.  At the very tail end of 2017 congress passed the Tax Cuts and Jobs Act, which was indeed a huge piece of legislation that ushered in a lot of changes.  It was aggressively promoted as a big middle class tax cut, which was false.  But in order to cement that impression the calculation for federal income tax withholding was updated to reflect the changes in the law, and whether purposely or not that little skew that held back a little more for most people was undone.  So people had less withheld from their paychecks, which was intended to make us feel like we were really benefiting from this tax cut.  Instead, most people did not notice the $5-10 extra dollars per pay period, but they did notice that at tax time in 2019 there was $240 less withheld over the year and now their refund was lower.

The new withholding calculations necessitated a new W-4.  A “simplified” W-4.  When filled out correctly, the new form results in a $0 tax refund.  How?  Well, let’s go back to what we used to report on the W-4.  The 2017 tax law nearly doubled the standard deduction, and placed limitations on what could be deducted.  Now somewhere north of 90% of people file using the standard deduction.  So just keep that in your pocket for a second.

Remember the second thing we put on the old W-4, the number of exemptions/allowances?  The 2017 tax bill reduced the dollar amount of the exemption to $0.  So, no more exemptions.  (By the way, this neatly offset the increased standard deduction, which is why most people’s taxes didn’t go down too much.)  Since there are no more reductions to your taxable income because of the number of people in your house, there is no more line item to claim allowances (exemptions) on the W-4.  That little shortcut we all knew how to use is gone.

OK, fine, so if you owe tax and want more withheld you can no longer simply reduce your allowances. That old “Married 0” no longer exists.  So let’s look at the other piece, the deductions.  Problem?  There is no way to take yourself lower than the standard deduction.  Any adjustments you make to the deductions line item on the new W-4 will result is LESS being withheld.

There are two places on the form where you can increase your withholding.  One is for reporting “other income”.  This is great, but I have absolutely no idea how to figure out how what you might put on that line will translate into dollars withheld from your pay, so no idea if it will be enough. And since different types of income are taxed differently you may still not have enough withheld.

The other place is an additional flat dollar amount to withhold from your pay.  That seems like the easiest thing to do, but people don’t like it.  And if we don’t get to your taxes until June or July by the time we make the adjustment in a dollar amount half the year or more has gone by.

And none of this even touches on how complicated this gets if you have more than one job, or if your spouse works, or if your income is uneven during the year,

So.  What do we do?  Great question and I do not have a good answer.  The IRS does have a withholding estimator that theoretically can help you fill out that W-4 correctly.  But I have run it with a few clients and have not been impressed.  It still feels like we don’t know if they will owe at tax time.


To be honest, and this is a crappy answer, I feel like we are just going to have to continue to wait for this all to shake out.  And of course in 2025 many of the provisions of that 2017 tax bill will expire, and we’ll probably start all over again.

Oh wait… I hear a cry on the wind…

But Jane, can’t we just give a percentage of our income that we want withheld?  So if we know that we paid 11% in tax the year before we can just have that much withheld?  Doesn’t that make sense?


So thoughts?  Questions?  Well, keep ’em to yourself.  Comments are now off 🙂


By |2022-12-08T11:35:53-05:00September 21st, 2022|FAQs, News|1 Comment

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  1. Margaret Sullivan September 28, 2022 at 11:01 am

    Thank you, Jane. Now I know for certain that I am not crazy! No Rorschach needed.

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