US Taxpayers Face Unexpected Liabilities as Income Changes Outpace Payroll Withholding
The Internal Revenue Service warns that employers typically withhold taxes based on a single income stream, meaning individuals must manually update their W-4 forms to reflect life changes or side earnings.
Individuals who pay taxes from every paycheck may still owe the Internal Revenue Service money if their employer does not withhold sufficient funds to cover increased income or significant life changes. A common cause of this underwithholding is a jump in tax brackets, such as moving from 12 per cent to 22 per cent, triggered by additional income or marriage.
Employers typically withhold taxes assuming only one income stream for a household, failing to automatically account for a spouse's income or secondary part-time jobs. For instance, a taxpayer earning $40,000 at one job and $30,000 at another may find their marginal tax rate shifts unexpectedly, resulting in a liability that was not anticipated during the year.
Life events such as marriage, a dependent child turning 17 and disqualifying them from the Child Tax Credit, or starting a new job can alter tax brackets and deductions. If neither partner updates their documentation to account for the other's income, a household that filed separately might land in a higher tax bracket together than they did apart.
To prevent large tax bills in April, taxpayers are advised to manually update their W-4 forms to reflect changes in marital status, number of jobs, dependents, or other income. The form instructs employers on how much money to withhold from paychecks and send to the government throughout the year, and adjustments can be made by submitting the updated document to the payroll department.
Self-employed individuals, including contractors for platforms like Uber and Doordash, face a different requirement as companies do not automatically withhold taxes for them. Those who expect to owe $1,000 or more in taxes for the year must file quarterly payments to cover their obligations.
The Internal Revenue Service recommends using the official Tax Withholding Estimator to determine if an update is necessary. The agency notes that completing this process takes about 25 minutes and is advised for those who expect to work only part of the year or have changes in their financial situation during the year.
