The amount of taxes you withheld is crucial for your tax return. Ultimately, if the taxes withheld is less than your tax bill, you will owe the IRS. If not, you will receive a tax refund.
As always, we recommend withholding as much tax as you can without shrinking your cash flow to a point where you are going to struggle. Most people use their tax refunds to make big purchases or put in a savings account. So you can think of your tax refund as you lending money to the government.
Although it is nice to save money that way, if you have the ability to make good financial decisions, you should withhold tax as close to your anticipated tax bill. By doing it this way, you can move the taxes withheld to a savings account and gain interest.
How to estimate taxes withheld?
Generally, you can use your paystubs to calculate how much taxes withheld in total but it is too much work. Instead, you should use the IRS tax withholding estimator. The estimator will ask you a series of questions and lead you from there to enter amounts related to your income and taxes.
Use the IRS estimator from here.
As seen in the image above, click on Use the Tax Withholding Estimator and start completing it. The estimator will guide you through every step of the way. Depending on your answers, the estimator should take between 3 and 5 minutes to complete.