TAS Tax Tip: Use Tax Withholding Estimator and Take Action on Your Tax Withholding Now

September 4, 2020

Is Your Tax Withholding Correct

The Taxpayer Advocate Service encourages you to use the Tax Withholding Estimator now. The Tax Withholding Estimator is a mobile-friendly online tool designed to make it easier to have the right amount of tax withheld during the year.

Who should use it and why now?

WHO - Every individual taxpayer.

  • Anyone who works for someone else (an employee) and depends on the tax withholding taken from their pay by an employer to cover taxes owed.
  • If you are currently unemployed.
  • If you are self-employed.
  • If you only have non-traditional income sources, like a pension, dividend income, rental income, etc.

WHY - So you don’t owe tax, interest and penalties later.

  • If you were unable to work because of COVID-19 and recently returned to work, you may not have enough tax withheld between now and the end of the year.
  • If you collected unemployment compensation this year (including any of the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act), it is considered taxable income and must be reported on your tax return, potentially increasing the tax owed. Generally, tax withholding is not taken from unemployment checks at all, so you may owe more tax, at tax time, as a result. If you don’t pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty.
  • If you count on the Earned Income Credit (EITC) to cover a portion of any tax due, remember that unemployment compensation is considered unearned income and it does not count when calculating EITC. This means the credit may be less than you expect based on the amount of unemployment benefits received.

Now is the time to use the Estimator to find out if you’ll have enough withholding to cover the amount of estimated taxes owed.

What information will I need to use the Tax Withholding Estimator?

Before using the Tax Withholding Estimator, you’ll need to have your latest paycheck handy, and it may help to have last year’s tax return to estimate income from investments or a side job. You should also review the Tax Withholding Estimator FAQs before you start.

What if I don’t have enough withheld?

  • If you are employed and you think you need to make changes to the amount withheld, you may have your federal withholding increased by preparing a new Form W-4, Employee’s Withholding Certificate. Give the completed form to your employer as soon as possible to make the changes.
  • If you aren’t employed or if the amount of income tax withheld from your salary or pension is not enough, you may need to make estimated tax payments. Also, if you are in business for yourself, you might need to make estimated tax payments too.
    • Form 1040-ES may be used to figure and pay your estimated tax payments. Instructions and payment vouchers are attached to the form. Estimated payment are due four times each year. The remaining due dates for this year are September 15, 2020 and January 15, 2021.
  • If you are unemployed and receive unemployment compensation you may choose to have a flat 10 percent withheld from your unemployment benefits to cover part or all of your tax liability.
    • Complete and provide Form W-4V, Voluntary Withholding Request (PDF), or another withholding request form, to the agency paying the benefits. Don't send it to the IRS.

What if I have too much tax withheld or overpay?

  • If you are employed and the Tax Withholding Estimator indicates you will have too much tax withheld, you may have your federal withholding decreased by preparing a new Form W-4, Employee’s Withholding Certificate. Give the completed form to your employer as soon as possible to make the changes.
  • If you aren’t employed or remain unemployed but you pay estimated taxes and pay too much because your income at tax time is lower than expected, you may end up with an overpayment. Any overpayment can either be refunded or applied to the next year’s taxes – your choice.

What if I can’t pay what I owe before tax time?

If you were out of work because of COVID-19 and either recently returned to work or are still unemployed, you may not be able to afford to increase your withholding or make estimated tax payments right now. Remember, however, that even by increasing your withholding by a few dollars or making a partial estimated tax payment, you can reduce the amount you will owe on your 2020 tax return.

If you can’t pay right now, through withholding or estimated tax payments, know that for any taxes you may owe next year, the IRS has payment options available. Which option might work for you generally depends on how much you owe and your current financial situation. Each option has different requirements and some have fees.

Most options for paying off a tax debt work best if you are proactive. More information is available here.

Taxpayer Advocate Service Help

Currently, the Taxpayer Advocate Service (TAS) is open to virtually serve taxpayers who find themselves in hardship situations or dealing with IRS tax problems they’ve been unable to resolve directly with the IRS. Visit our Contact Us page to see who qualifies for TAS assistance. We will also be posting updated operational status information there as well.

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