Reviewing and Updating Employee Tax Withholding for the New Year

by Jannette Lajom, Tax Service Manager

As the new year approaches, it’s time for businesses and employees to reassess financial planning. An essential part of that process is reviewing employee tax withholding. Proper withholding ensures employees avoid unpleasant surprises at tax time, such as owing more taxes than expected or overpaying throughout the year.

This blog will walk you through why it’s crucial to review tax withholding each year, what changes to consider, and best practices to help both employers and employees stay compliant and financially prepared for the upcoming tax season.

Why Review Employee Tax Withholding Annually?

Changes in tax laws, income levels, or personal circumstances can significantly impact the amount of taxes owed. Failing to adjust withholding can result in tax penalties or refunds that could have been better managed throughout the year.

Here are a few reasons to review tax withholding annually:

1. Tax Law Changes: Updates to federal and state tax brackets or tax credits may affect how much employees need to withhold.
2. Salary Adjustments: A raise, bonus, or job change can push employees into a different tax bracket, requiring updated withholding.
3. Life Events: Marriage, divorce, children, or buying a home often change an employee’s tax situation and eligibility for deductions or credits.
4. Avoiding Penalties: Employees who underpay throughout the year may face IRS penalties during tax filing.
5. Managing Cash Flow: Adjusting withholding can help employees plan their cash flow better, either reducing their refund or increasing take-home pay throughout the year.

How to Review Employee Tax Withholding

1. Encourage Employees to Use the IRS Withholding Estimator

The IRS Withholding Estimator is a helpful tool that allows employees to determine whether their current withholding aligns with their tax obligations. It accounts for salary, deductions, and tax credits to provide an accurate recommendation.

• Action Tip: Share the link to the IRS Withholding Estimator in your year-end communications to employees and encourage them to use it before the new year.

2. Provide Employees with Updated Form W-4

The Form W-4 helps employees specify how much federal income tax to withhold from their paycheck. Since the IRS redesigned the form in recent years, employees may need a refresher on how to complete it correctly.

• Action Tip: Distribute updated W-4 forms along with easy-to-understand instructions, especially for new hires or employees experiencing life changes. Offer to help answer any questions about the process

3. Assess State and Local Tax Changes

Some states adjust tax rates or introduce new laws that can affect withholding. It’s essential to monitor any state-level changes that could impact your business and employees.

• Action Tip: Stay informed about new state and local tax legislation. Share these changes with employees, especially those working remotely, as state taxes can vary depending on their location.

4. Automate the Withholding Update Process

Using payroll software to automate withholding calculations ensures accuracy and minimizes compliance risks. Many payroll systems, like ours, automatically apply the latest tax rates and rules, reducing the administrative burden on HR and finance teams.

• Action Tip: Conduct a year-end audit of your payroll software to confirm that all tax settings are up to date and aligned with IRS and state guidelines.

Tips for Employers: Make Withholding Updates Easy and Accessible

• Communicate Early: Start reminding employees about reviewing their tax withholding in November or December.
• Offer Support: Provide clear instructions or host a workshop/webinar to guide employees through adjusting their W-4 forms.
• Monitor Compliance: Ensure all employees who need to make changes submit updated forms in a timely manner.

Employee Best Practices for Withholding Adjustments

1. Review After Life Changes: Employees should update their withholding whenever they experience major changes, such as marriage, having a child, or purchasing a home.
2. Account for Multiple Jobs: Employees with more than one job need to ensure withholding across all employers covers their full tax liability.
3. Check Withholding Early in the Year: Employees can use the first few paychecks of the year to verify if adjustments are correct. It’s better to spot issues early to avoid surprises at tax time.

Common Pitfalls to Avoid

1. Not Reviewing Withholding at All: Many employees forget to adjust their withholding after significant changes, leading to underpayment or overpayment.
2. Relying on Previous Year’s Settings: Tax laws change frequently, and withholding amounts should not remain static from year to year.
3. Ignoring Bonuses or Variable Pay: Employees earning bonuses or commissions may need to adjust withholding to avoid underpayment penalties.

Conclusion: Start the New Year on the Right Foot

Reviewing and updating employee tax withholding may seem tedious, but it’s a vital step toward financial stability and compliance. Both employers and employees benefit from an annual review—ensuring taxes are accurate, avoiding penalties, and aligning take-home pay with financial goals.

As the new year approaches, take the time to evaluate and communicate the importance of tax withholding. Providing resources, automated tools, and guidance will empower employees to make informed decisions, keeping everyone on track for a smooth and compliant tax season in 2025.

Encourage your employees to review their withholding today, and help them take the stress out of next year’s tax filing.

As an experienced payroll partner, we offer support to help keep payroll processing organized, compliant and accurate. Clients can expect to have access to a variety of resources, training and educational webinars to stay current with the latest news and information.

Our payroll professionals assist our clients with payroll, workforce management, benefits administration, and human resources needs. To get started or learn more about these solutions, simply contact us today. We also invite you to meet with us today for a complimentary HR consultation and to learn how we can support objectives, overcome challenges, and address issues quickly and accurately.

For more information about our payroll services, please contact our payroll professionals at 909.946.2032. Or, click here and Let’s Talk!

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*Southland Data Processing (“SDP”), an MPAY Company, is not a law firm. This article is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other SDP materials does not create an attorney-client relationship. SDP is not responsible for any inadvertent errors that may occur in the publishing process.