How to Not Owe the IRS When You File Your Taxes

irs tax tips taxes w-4

Tax season just ended and one of the number one questions that I've been getting is with people who end up owing the IRS when they get the results of their tax return back.

And the reason they owe is because they haven't withheld enough Federal withholding taxes from their employer. In other words, they haven't been withholding enough in taxes to cover their tax bill at the end of the year.

In this blog post, I'm going to show you how to fix this for next year so you don't ever have to owe at tax time ever again.

As a bonus, I'm going to outline why all of a sudden, this became a problem. For example, lots of people may have gotten refunds in the past but to their surprise, in recent years, they found themselves owing the IRS. Lots of people have asked me this, and I have an answer for that. So keep reading!

By the way, if you don't know me, I’m Noel Lorenzana, I’m a CPA, and I’ve been helping good folks just like you with their taxes for a very long time. I actually prepare taxes, and I enjoy it. Not all CPAs do taxes, so there's that.

Why Do I Owe Taxes This Year?

So, if you're reading this, you probably found yourself owing at tax time and you were probably upset about it.

The reason you found yourself owing the IRS is very simple. You didn’t withhold enough federal taxes from your employer.

Or it could be that you earned additional side income. Maybe you had a side hustle and with that, you probably didn't make any estimated tax payments. Meaning you didn't set aside enough money for taxes.

For employees, you set aside taxes with your employer, using the W-4 form. It’s used for determining the amount of federal income tax to withhold from employees' paychecks.

So If You've Underwithheld, How Do You Fix This?

First off, if you've got a side hustle then you might consider making quarterly estimated tax payments. Especially if you think your side hustle income will generate a tax bill of more than $1,000 dollars. That's the IRS guideline.

Now if you don't have a side hustle or freelance income, then what you need to do is adjust your form W4 with your employer. I know what you might be thinking… yeah, I've already done that and you selected zero exemptions and single so they should be taking the maximum amount of taxes out, right?

Introducing The New Form W-4

Well unfortunately the old rules that you might be familiar with… those no longer apply. They've reworked or redesigned the form W-4 and the way it calculates now is completely different than how they did it in the past. So forget about what you used to know for form W-4, it no longer applies.

Now if you actually completed correctly, the new form W-4, it actually estimates your taxes pretty darned well. Let's look at a few things:

For example, let's look at the newly redesigned form W-4. I mean at first glance you can see that it's completely different from the old form, from before. Right? You see what I mean.

(The old Form W-4 is on the left, and the new Form W-4 is on the right.)

 It’s completely different, right?

If you want an accurate withholding, you need to complete the new W4 form. It’s not complicated, but you need to read the instructions and complete the form.

For example, if you’re married, you need to focus on Step 2, because in Step 2, this is where you account for the income of your spouse, or a second job if you have one.

Pro Tip: W4 Married Filing Jointly

Now, here’s a pro tip: If you and your spouse each have one job, then be sure to check the box in option (c) as shown here.

This tip can really save you lots of time from having to figure out - how to fill out the form, and it results in a much better estimate..

How to Adjust Your Tax Withholding?

Okay, so the other way to adjust your withholding using the form is in Section 4. Option 'c' allows you to specify an additional amount of tax to be withheld from each paycheck.

So, if you end up owing $2,000 at tax time, you can take that amount and divide it by the remaining pay periods in the year. Let’s say there are 16 pay periods left in the year. So two thousand dollars divided by 16 is $125 dollars. Put that on line 4(c), and your employer will take out an additional $125 dollars for each upcoming pay period.

Problem solved, no more owing at tax time.

When and Why the IRS Adjusted the Payroll Tax Tables

So the question that often comes up is, when and why did things change?

You may recall in 2018, with the passage of the Tax Cuts and Jobs Act, the IRS adjusted the payroll tax tables.

Why did they do this?

Well, they doubled the standard deductions, eliminated personal exemptions, and doubled the child tax credit among other things.

The updated tables were adjusted to incorporate the changes, and better match how much tax comes out of your paycheck with what you might actually owe. They wanted everyone to see the effects of the new tax laws on their paychecks right away.

Ultimately, these were good changes, but it reduced what was withheld from your paychecks and that’s still in effect today.

Now, this was in 2018, and for the next couple of years, people adjusted to the new payroll tax tables and adjusted their tax withholdings accordingly.

But that’s not all…

The New Form W-4 Vs. Old Form W-4

In 2020, the IRS completely overhauled the W-4 form. Again, this was because of the Tax Cuts and Jobs Act.

The new W-4 form removed allowances, which is what you probably remember. You would increase or decrease the number of allowances to adjust your withholding. Those days are long gone.

Now the IRS uses what they describe as a more straightforward approach that aligns more closely with an individual's tax return. Uh-huh. It includes sections for multiple jobs and spouse's work, dependents, and other income and deductions.

Believe it or not, it does make the withholding calculation more accurate. That is, if you’re willing to take the time to read and follow the instructions.

Do you like the new W4 or the old W4? As for me, call me old-fashioned, but I like the old version.

And that's about it as always, thanks for reading and see you in the next blog post!

About The Author

Noel Lorenzana is an Illinois-licensed, Registered Certified Public Accountant with over 20 plus years of experience.

Through his online educational content, YouTube videos, easy-to-understand courses and 1-on-1 consulting, he gives you the tools to become tax savvy for yourself. 

Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.