According to Clay Sanford, IRS spokesman one should try to have their income tax withholding match actual tax liability.
If not enough tax is withheld, you will owe tax at the end of the year and may have to pay interest and a penalty. If too much tax is withheld, you will lose the use of that money until you get your refund. The withholding calculator at IRS.gov can help you figure the correct amount of federal withholding and provide information you can use to complete a new Form W-4, Employee’s Withholding Allowance Certificate.
Before you begin, you need to have a few items handy: Your most recent pay stubs and your most recent federal income tax return.
Here are some tips for using the withholding calculator:
• Fill in all information that applies to your situation.
• Estimate when necessary. Remember, the results are only as accurate as the information you input.
• Check out the information links embedded in the program whenever you have a question.
• Print out the final screen that summarizes your input and the results. Use it to complete a new Form W-4 (if necessary) and give the completed form to your employer. Keep the print of the final screen and a copy of your new W-4 with your tax records.
For many people, the withholding calculator is a great tool that can simplify the process of determining their withholding. Also, see Publication 919, How Do I Adjust My Tax Withholding, which is available at IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676).