Revisiting Your Withholding in 2023

Unless you are self-employed or receiving distributions from a trust fund, you are likely to be earning a salary or wage from a company, government body or institution. Unfortunately, in most cases, your take-home pay is not as much as your topline compensation. The difference is largely attributable to federal income tax withholdings.

In addition to federal tax withholdings, wage-based earnings are also subject to state and local tax withholdings and benefit deductions for things like health care insurance and retirement savings.

The Internal Revenue Service (IRS) facilitates the withholding process by requiring employees to file a Form W-4 with their employer. This occurs any time you start a new job, but the IRS recommends you file a new Form W-4 anytime your personal or financial situation changes in a way that could affect your gross income, tax filing status or the tax credits or deductions available to you. 

Changes that warrant filing a new Form W-4 include, but are not limited to, getting married or divorced, adopting a child, inheriting a large sum of money and experiencing a significant change in anticipated annual income.

That said, for 2023, revisiting your tax withholding is a good idea whether you’ve recently experienced a lifestyle change or not. Why? It relates to inflation-induced changes to many aspects of the Internal Revenue Code for 2023, most notably the federal income tax brackets.

2023 Tax Bracket Changes

Broadly speaking, the 2023 tax brackets have increased by about 7% for all filing statuses. This is significantly higher than the roughly 3% and 1% increases enacted for 2022 and 2021, respectively.

For taxpayers, this is good news, and it reflects the IRS’ intention to align its rates with the economic realities of U.S. citizens. Holding all else constant, it means many taxpayers will experience an increase in take-home pay this year, as more of their earnings will be taxed at lower rates.

However, the Internal Revenue Code contains many other provisions that have also been adjusted for 2023, including the standard deduction and an array of focused deductions and credits, along with corresponding contribution limits and phase-out parameters. Given all the moving parts, taking a fresh look at your withholdings is advisable.

Note: For some high earners, the significant bump in earnings subject to the Social Security payroll tax could offset the economic benefits achieved via higher tax brackets. For 2023, subject earnings have increased by nearly 9%, from $147,000 to $160,200.

An Experienced CPA’s Perspective

Mike Robb, CPA, founder of Michael T. Robb & Associates Inc., is a tax professional with over 42 years of experience with tax preparation and compliance. In recent correspondence, he offered additional guidance, which I’ve paraphrased below.

The current withholding tables do not take job changes into account. This is notable because each time you start a new job, the progressive tax withholding rate reverts to zero — even though earnings from your previous job may have pushed you into a much higher tax bracket. Unless you make an adjustment to account for this issue, you could face a significant withholding deficiency when filings your taxes.

Another withholding pitfall pertains to married individuals who file jointly, while each earns a significant amount of money. In this scenario, each spouse needs to be careful not to claim too many allowances. A straightforward approach is for each spouse to have tax withheld as a single filer, even though they intend to file a joint tax return.

Determining and Processing the Appropriate Withholdings

To calculate your federal income tax withholdings, use the IRS Tax Withholding Estimator. The tool allows you to estimate your baseline federal income tax withholding and take-home pay. It also lets you see how you will be impacted by withholding more or less than the baseline amount, which informs you of the tax obligation or refund you can reasonably expect.

To effectively use the tool, have the following information handy:

  • Your most recent pay statements (as well as those for your spouse, if applicable)
  • Documentation for any non-employment sources of income
  • Your most recent income tax return

Once you determine the appropriate withholdings, work with your employer to obtain and complete Form W-4 if necessary. Some employers work with the hard copy form available via the IRS website, others have automated the filing process via payroll systems such as Workday HCM and ADP Workforce Now.

Key Deadline Notice

If you had an exemption from federal income tax withholdings for 2022 and wish to extend it for 2023, your deadline to refile a Form W-4 with an exemption claim is Feb. 15, 2023. To qualify for exempt status, you must have had no tax liability for 2022 and must expect to have no tax liability for 2023.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: November 7, 2023