A Year End Withholding Check Could Save You a Tax Surprise
A few minutes with your pay stub now can help you decide whether to adjust your final paychecks of 2026.
If you have a W-2 job, take a look at your federal income tax withholding before the year ends. A raise, a second job, investment income, or a side business may have changed your tax picture since you last filled out Form W-4. On the other hand, you may be having more withheld than you need.
The free IRS Tax Withholding Estimator can help you project your 2026 tax and decide whether to change your withholding. Have your latest pay stubs, your spouse’s pay stubs if you file jointly, and records of other income and tax payments handy. The estimator can help you prepare an updated Form W-4 for your employer.
If you have a W-2 job and a side business, pay particular attention.
Income from self-employment can increase both your income tax and your self-employment tax. If you have also been making quarterly estimated tax payments, include those payments when reviewing what you have paid so far. The IRS estimator accepts information about self-employment and gig work when you also have W-2 wages or a pension or annuity with withholding.
There is a useful year-end option for someone who has fallen behind on estimated tax payments: increase the federal income tax withheld from the remaining W-2 paychecks. For purposes of figuring an estimated tax underpayment penalty, federal income tax withheld during the year is generally treated as though one-fourth was paid on each estimated tax due date, unless you choose to establish when it was actually withheld. That means additional withholding late in 2026 may help cover a shortfall from earlier payment periods. A late estimated tax payment generally does not get that same treatment.
For example, suppose your side business did better than expected, but you missed some estimated tax payments. After projecting your full-year tax, you might ask your employer to withhold an additional amount from each remaining paycheck. Whether that is enough to avoid a penalty depends on your complete tax picture and how much can actually be withheld before year-end.
How much is enough?
Generally, taxpayers can avoid an estimated tax underpayment penalty if they owe less than $1,000 after withholding and refundable credits, or if timely payments meet the applicable safe harbor: at least 90% of the current year’s tax or 100% of the prior year’s tax, whichever is less. The prior-year percentage rises to 110% for certain higher-income taxpayers. There are additional rules and exceptions, so a refund on your return does not, by itself, prove that no underpayment penalty applies.
If you discover you have over-withheld, an updated W-4 could increase your take-home pay for the rest of the year. Keep a sensible cushion if your income or deductions are uncertain.
Make the change while there are paychecks left!
Check your employer’s payroll cutoff dates; a W-4 submitted in December may take time to affect a paycheck. If you make a large year-end adjustment, check your withholding again in January. An instruction designed to catch up over a few remaining pay periods may withhold far too much if it stays in place for all of 2027.
A year-end review is especially worthwhile if you have both wages and business income. It gives you time to make a useful adjustment while you still have 2026 paychecks to work with.
GurelCPA can help you project your total tax, review estimated payments, and determine whether a withholding adjustment makes sense for your situation.
The article is meant for informational purposes only. Please contact me directly to discuss how this applies to your individual tax situation.