What is Overwithholding?

Overwithholding refers to the practice of taking more taxes from a paycheck, usually as done by an employer or payroll clerk, than are required to pay the amount of taxes you will owe at the end of the year. If the employer has practiced overwithholding, you’ll usually note this when you file your taxes at the end of the year because you’ll receive money back. Usually, when taxes are overwithheld, it’s not purposeful on the part of the employer, and your receiving a refund at the end of the year is related to the fact that you didn’t claim enough deductions on your W-4 forms. Sometimes, when a salary is very small, or if circumstances leave you without employment for part of the year, any taxes you paid, regardless of how many deductions you took when you were working, will be returned to you.

Many times, employees will note overwithholding especially if they receive extra money for working a little overtime, or if they receive a year-end bonus. Bonuses typically get taxed at a much higher rate since they appear in most tax software, to raise your salary significantly. Since bonuses most frequently occur at the end of the year, you may not want to try to make any adjustments to receive more of your bonus. By filing your taxes early, as soon as you have your W-2 forms, you can get back any amount overwithheld, and possibly have a nice amount of extra income at the beginning of the year.

There are certain circumstances where people want their taxes overwithheld. If you have a partner or spouse and both people work, an employer doesn’t consider combined income. Usually only your income counts when the employer takes out taxes, which can result in problems. If you both claim the same amount of deductions, you could end up owing taxes. Each salary is considered separate, so it appears that an individual salary is the only one made. If you’ve owed taxes in the past, it’s a good idea to have one partner claim fewer deductions to avoid having taxes underwithheld.

Another instance where overwithholding on purpose can be helpful is if one partner works as an independent contractor. If that spouse is not making quarterly estimated tax payments, the spouse working in a traditional employment setting may want to claim fewer if any deductions to make up for the money that is not being deducted from the independent contractor’s paycheck, which includes payment for social security taxes. When you don’t set up a plan to withhold taxes yourself during the year, or make payments as the year progresses, the spouse working at the traditional job should, unless joint income is below poverty level, take fewer deductions so no tax debt exists at the end of the year. It’s a good idea to sit down with your human resources department and discuss your and your partner’s salaries to decide what would be considered a reasonable deduction level given your joint salaries. Alternately you can call the IRS and ask them to help you determine this.

There are a few other reasons why you might also want to instruct your payroll department or boss to practicing overwithholding. If you realize you may have been paying too little in taxes, overwithholding the last few months of a year (unless the amount is very significant) could make up some of those missed taxes. Also if you or your spouse changes jobs and/or receives a large increase in salary, you may want to claim fewer deductions to be sure that you aren’t undertaxed. Don’t forget that you should change your exemption status if you have fewer dependents or your marital status changes. If you marry, you should probably be sure to change your W-4, and possibly overwithhold taxes so you won’t owe a huge bill at the end of the year.