En español | If you are still smarting from last year’s surprise tax bill, hear this: The Internal Revenue Service (IRS) has created a new tax withholding estimator — a redesigned online tool — that can help you eliminate unexpected tax bills or obtain a larger refund come April 15.
The IRS previously adapted its old withholding calculator to the new tax legislation passed in late 2017 but realized it needed to go further to make it more useful to taxpayers. The result is the new tool.
The IRS Tax Withholding Estimator is “a little more tailored to your individual situation based on your answers” in six steps, IRS spokesman Eric Smith says.
What’s new about it?
First, the estimator figures how much tax you owe on your Social Security retirement benefits and Social Security Disability Insurance (SSDI) and incorporates that number into your total tax liability if you enter the correct numbers at each step.
The previous calculator did not clearly include Social Security, Smith says.
Second, the estimator can recommend how much tax you might want to have withheld from your pension.
Third, the estimator gives you a choice if you want a refund or prefer to owe no more than a small amount if you file your 2019 taxes by April 15. The choices it gives you:
- I’d like to get a refund
- Get my balance close to zero
“You can choose how much you want withheld,” Smith says. “If you want to avoid a big tax bill, specify that you want a refund of $500 or more.”
After you’ve answered, “I’d like to get a refund,” you’re offered only once choice, “For a refund of approximately or greater than $500.” If you choose, “Get my balance close to zero,” your only option is, “For a refund of approximately or greater than $50.”
Either way, the estimator links you to a blank Form W-4 on the IRS website.
“It will tell you what to enter in each line,” Smith says. “You can download the W-4 and print it and give it to your employer.”
Alternatively, you can electronically change your Form W-4 on your employer’s electronic system once the estimator has completed its calculation. If you have pension income, the estimator links you to a blank Form W-4P and recommends how to fill out that withholding form. You can give the form to your pension payer.
“The better [the] information you have when you use the tool, the more accurate [the result] will be,” Smith says.
If you want to have tax withheld from your Social Security benefits, use Form W-4V, Voluntary Withholding Request, which is not linked to the estimator.
The estimator is designed for those who work for someone else and receive a W-2 form in January or who get a pension.
If you are a sole proprietor or are incorporated, you are required to make quarterly tax payments that include self-employment tax because you don’t have tax withheld from your earnings.
The estimator is “not really designed for that person who doesn’t have [tax] withholding,” Smith says. “It assumes you have some kind of paycheck, some withholding source.” That source could be a pension.
However, if you are a sole proprietor and file jointly with a spouse who has taxes withheld through a paycheck, the estimator will be useful. If you indicate that you have no income from a job or a pension subject to federal tax withholding, a message will pop up that says, “This tool is not relevant to your tax situation.” If you have entered your information incorrectly, you can start over.
To look at the rules and regulations on paper, the tool refers you to IRS Publication 505, Tax Withholding and Estimated Tax.
If you’re an employee and have a side gig, the estimator will ask questions about estimated tax payments and self-employment tax you already have made for 2019 so they will be incorporated into your estimated taxes due.
The estimator will not ask you for your Social Security number or any other personally identifiable information and does not store the information you provide, the IRS says.
Editor's note: This article has been updated with new information.