Yes, when the withholdings are decrease significantly, this can definitely create an unexpected tax bill. This decrease in withholdings often occurs when employees have submitted a new W4 change, changes jobs, or an employer changes payroll companies, The solution is to submit new Form W-4s to your employers. The new W4 forms are designed to be more accurate and do include a specific section for households with multiple jobs. To update your Form W-4, which tells your employer how much to withhold for federal taxes follow these steps:
- Use the IRS Tax Withholding Estimator: This is the single most important step you can take. The IRS offers a free, online and mobile-friendly tool that will give you the most accurate withholding recommendation.
- Gather your documents: You'll need your most recent pay stubs and a copy of your last tax return. You'll also need the same information for your spouse.
- Input the data: The tool will guide you through entering your combined income, filing status, and any other relevant tax information.
- Get your results: The estimator will tell you exactly how to fill out a new W-4 for each of your jobs to ensure the correct amount of tax is withheld. It will provide a specific amount to enter for additional withholding to get your tax liability as close to zero as possible.
- Submit a New Form W-4
- Once you have the results from the estimator, you must give your employer a new W-4.
- Complete the forms: Each of you will fill out a new W-4. The most crucial part will be Step 2, which is for multiple jobs or a working spouse. You can either check the box for two jobs or use the estimator's results to fill in the exact amount of additional withholding.
- Give to your employer: Your employer will use this new form to adjust your withholding, and the change should take effect within a few pay periods.
The penalty you paid was an "underpayment penalty." To avoid this, you must pay your tax liability as you earn income, either through payroll withholding or by making estimated quarterly tax payments. The penalty is triggered if you owe more than $1,000 when you file your return.. You can generally avoid an underpayment penalty if you pay the lesser of these two amounts through withholding and estimated payments:
- 90% of your current year's tax liability: This amount is based on your total tax owed for the current year.
- 100% of your prior year's tax liability: This rule is based on the total tax from your previous year's tax return.
High-income taxpayer exception: If your Adjusted Gross Income (AGI) on your prior year's return was more than $150,000 ($75,000 if married filing separately), you must pay at least 110% of your prior year's tax
By following the steps above and submitting new W-4s as soon as possible, you can increase your withholding for the rest of the year and lessen how much you will owe with your 2025 tax return.
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