W-4 Update After Raise

[srwong41]

I get a raise every year and have owed taxes every time. How do I update my W-4 after getting a raise so I don't owe taxes again this year?

[AmyATX]

The (new) W-4 has a place where you can withhold additional amounts per paycheck.  For example, if you owed money for 2024 (let's say $1,200), then you can add $50 as a manual add to your W-4 if you are paid twice a month which will then withhold (full year) an additional $1,200.  When you get a raise, it is a good time to update that additional amount.  

The IRS also has a free W-4 calculator that helps you determine what additional amount may be needed in your situation.  It also takes into account income that does not have withholding (such as investment income, rental income, etc).  Here's that tool:  https://www.irs.gov/individuals/tax-withholding-estimator

Thanks for asking your question!

[srwong41]

I used the calculator and input my most recent paystub information all correctly and it says that I am actually withholding more than needed per paycheck; however, last year I owed money (hundreds) in federal and state. I think this may be due to my brokerage accounts with Vanguard? How do I use the calculator to add in the returns for that?  How do I know how to use this correctly to adjust the form if the calculator is giving me information that contradicts the empirical results?

[AmyATX · Accepted solution]

The IRS tool works against the current year (2025) so if you only owed a relative small amount (hundreds) that same amount of income would have fewer taxes on it using the 2025 rates 

I'd also suggest double checking your investment income inputs.  Interest & dividends are taxed slightly differently than qualified dividends and capital gains/losses.  If you skipped that part on your estimate, then you also would have shown that you would have a higher amount being withheld than if that income was part of the estimate.

To add the Vanguard/investment income, there is a section for "Other sources of Income" under which is "Investment Income".  When you click onto that box, you get addition options for items like your interest/dividends/stock gains/losses/etc.  The more accurate your inputs, the more accurate the estimate!

[srwong41]

Thank you for the quick reply. So I input my investments and got new adjustments and withholdings for federal. My question now is about my state specific taxes (AZ). I owed a few hundred dollars in state taxes for 2024 while having my withholding percentage set to the max (3.5%). How do I go about calculating how much additional withholding I need so I don't owe state taxes again?

[AmitaR · Accepted solution]

If you have balance due on your AZ state return even after you selected the highest 3.5% withholding rate, you can check the box and enter an additional amount to be withheld from each paycheck.  You mentioned that your balance due is few hundred dollars, for example, let's say your balance due is $750 and you have 15 paychecks remaining for Tax Year 2025.  You can divide $750 by 15 and have an additional $50 withheld each pay check.