You’re a W-2 employee and you withhold taxes. But you owe taxes when you file.

How come you have a tax due balance when you are withholding taxes on your paychecks? Let’s dig in.

You may have other income not subject to withholding. Do you have self-employment income from a side gig but are not withholding taxes or making estimated tax payments? Then you will likely have a tax due balance when you file.

Do you have outside investments, including partnership income, that distributes income to you on 1099-DIV, Schedule K-1 or a consolidated 1099? Then you may not have withholding to pay the proper tax due.

Do you have multiple jobs? You may have to increase the withholding of taxes on your paychecks. Both employers will start to withhold a 10% minimum throughout the year although your marginal tax rate may be 22%. This will cause withholding to be too low to cover the taxes owed. What is the marginal tax rate? It is the additional tax you pay for every extra dollar you earn. If you are in the 22% tax bracket and have two jobs, you should have the W-4 filled out to start withholding at the higher rate of 22%.

Why would you have a big refund?

You may a lot of deductions and credits such as mortgage interest, student loan interest, and child care expenses which reduces your taxable income. You may be withholding for a higher income amount creating a big refund when you file.

When you receive a big refund, you are lending the government money at 0% interest. You may want to reduce your withholding if your income will remain the same to avoid having a large refund. Especially if your cash flow is tight.

How can you make sure to have the proper withholding?

The IRS is encouraging taxpayers to review their tax withholding as soon as possible to avoid having a big refund or a balance due when filing taxes next year. You can use the Tax Withholding Estimator on the IRS website here: https://www.irs.gov/individuals/tax-withholding-estimator

The Tax Withholding Estimator will ask for your filing status (single, married filing jointly, head of household, etc.), number of dependents, estimated income for the year (you can use your latest paycheck if you are only a W-2 employee), other relevant information such as self-employment income or investment income.

The Tax Withholding Estimator will then calculate how much tax you should have withheld from your paycheck. You can then adjust your withholding by submitting a new Form W-4 to your employer.

If you file your own returns, the tax software may help you prepare a W-4. Your tax preparer can also prepare a W-4 based on the information provided on the tax return plus the current paychecks.

Now is a good time to start reviewing your withholding to see if you have enough paid in taxes to avoid any surprises when filing in 2024.