Your W-4 and Withholding: Why Your Refund Changed and How to Fix It

Your refund in April is the difference between what your employer took out during the year and what you actually owed. Nothing else. A $4,000 refund means you lent the government $4,000 interest-free; a $4,000 balance means it lent you the money and may want a penalty for the favor. The W-4 is the form that sets the amount, and most of them were filled out on the first day of a job, in a hurry, years ago.

The form was redesigned in 2020 and no longer uses “allowances.” People who learned the old one find the new one unfamiliar, and the new one is unforgiving in one specific situation: two earners in one household. Below is how the form works, where it goes wrong, what changed for 2026, and the forms that do the same job for pensions, Social Security and IRAs.

Five Steps, Two That Matter

The IRS calls it: Form W-4, Employee’s Withholding Certificate

The current W-4 has five steps. Step 1 is your name, address and filing status. Step 5 is your signature. If you complete only those two, your employer withholds as if this job is your household’s only income and you take the standard deduction for your filing status. For a single person with one job and nothing unusual, that is usually about right.

Everything else is an adjustment. Step 2 is for a second job or a working spouse. Step 3 lowers withholding for children and other dependents. Step 4 raises it for other income, lowers it for large deductions, or adds a flat extra amount per paycheck. The form is designed so that you only touch the steps that apply, and the mistakes come from the steps people skip.

You can file a new W-4 with your employer any time, as many times as you like. It takes effect within a pay period or two. There is no reason to live with the wrong one until January.

The Two-Earner Problem

The IRS calls it: Step 2, multiple jobs or spouse works

Here is the mechanism behind most surprise balances. Each employer withholds as if the wages it pays are the household’s only income. Two spouses earning $80,000 each are each withheld as if the family made $80,000 and had the full $32,200 standard deduction and the full 10% and 12% brackets to itself. The real return has $160,000, one standard deduction, and a good deal of income in the 22% bracket that neither employer withheld for. The shortfall is typically $2,000 to $5,000, and it shows up every April until someone fixes Step 2.

Step 2 gives three ways to fix it. Option (c), the checkbox, is the simple one: if the two jobs pay roughly the same, both spouses check it and each employer withholds at a higher rate that assumes the other income exists. Option (b), the worksheet, is more precise when the jobs are different sizes; it produces an extra dollar amount that goes on line 4(c) of the higher-paying job’s W-4 only. Option (a), the IRS estimator at irs.gov/W4App, does the arithmetic for you and is the best choice when there are three jobs, a side business, or a mid-year change.

Two rules of thumb. Only one spouse should claim the children in Step 3, and only the extra withholding from Step 2 should be split. If both spouses put the kids on both W-4s, the credit is counted twice and the refund becomes a balance.

We both got raises, we both got promoted, and we both owe. I thought the point of the W-4 was to prevent exactly this.

Steps 3 and 4: Dependents, Other Income, Deductions

Where the money actually moves

Step 3 is the child tax credit done in advance. For 2026 you enter $2,200 per child under 17 and $500 for each other dependent, and your withholding drops by that amount over the year. The credit phases out above $200,000 single or $400,000 joint, so above those incomes leave Step 3 blank or you will under-withhold. Do it on one job only.

Step 4(a), other income, is for income with no withholding of its own: interest, dividends, a small rental, a side gig. Enter the annual amount and your employer withholds on it too. This is the simplest way to cover a $6,000 side business without making estimated payments.

Step 4(b), deductions, is the worksheet for people who itemize well above the standard deduction, or who have large above-the-line deductions. It has grown for 2026 (see below). Most people with a mortgage under the $40,400 SALT cap and the $32,200 standard deduction still don’t itemize and leave it blank.

Step 4(c), extra withholding, is the override. A flat dollar amount taken from every check. When in doubt, this is the line: if you owed $2,400 last year and nothing has changed, $100 a check on a semi-monthly payroll fixes it exactly.

What Changed for 2026

The 2026 Form W-4, revised for the 2025 tax act

The IRS released a revised W-4 for 2026 to handle the new deductions. The Step 4(b) deductions worksheet now has lines for qualified tips and qualified overtime, so a server or a nurse who expects to deduct them can lower withholding during the year instead of waiting for the refund. The Step 3 child amount moved to $2,200. Step 3 is now split into 3(a) and 3(b). And there is a new “exempt” checkbox replacing the old practice of writing the word below Step 4; exempt means you expect no tax liability at all this year and had none last year, which is rare for anyone working full time.

The senior deduction ($6,000 for those 65 and over, phasing out above $75,000 single or $150,000 joint) and the car-loan interest deduction are deductions too, and they belong in the same worksheet if you want them reflected in your paycheck. For most retirees the senior deduction matters more on the pension form than on a W-4.

One caution. The tips and overtime deductions have income limits and definitions that are still settling, and over-withholding on them is cheap while under-withholding is not. If you’re unsure, leave them off the W-4 and take the deduction on the return.

Pensions, Social Security and IRAs

The IRS calls them: Forms W-4P, W-4V and W-4R

Retirement income has its own forms, and the default settings are where retirees get hurt.

• Pensions and annuities: Form W-4P. Works like the W-4, with the same steps. If you don’t file one, the payer withholds as if you were single with no adjustments, which ignores your Social Security, your spouse’s pension and everything else on the return. For a couple with two pensions that default is usually too little by a few thousand dollars. Colorado PERA retirees: file it with PERA, and remember PERA is fully taxable federally.
• Social Security: Form W-4V. Voluntary, and most people never file it. You can choose 7%, 10%, 12% or 22% of each benefit payment. For a couple with a pension and Social Security, 10% or 12% on the benefit is usually what closes the April gap. This is the most common fix for retirees.
• IRA and 401(k) withdrawals: Form W-4R. For one-time or irregular withdrawals. The default on an IRA distribution is 10%, which is almost always too little for anyone in the 22% bracket. A rollover-eligible withdrawal from a 401(k) has a mandatory 20% unless it goes directly to another account.
• Required minimum distributions can carry the whole year’s withholding. A retiree who takes a $30,000 RMD in December and has 60% of it withheld has covered the tax on the pension and Social Security too, because the IRS treats withholding as paid evenly through the year regardless of when it happened. It is the cleanest way to avoid estimated payments.

The Underpayment Penalty and the Safe Harbors

The IRS calls it: Form 2210, and Section 6654

You owe a penalty if you didn’t pay in enough during the year, through withholding or estimated payments, even if you pay the balance in full on April 15. The penalty is interest, currently 7% a year (the rate for the last quarter of 2026), computed by the quarter. You avoid it entirely if your payments during the year reach any one of three safe harbors:

• 90% of this year’s tax, or
• 100% of last year’s tax, or
• 110% of last year’s tax if last year’s adjusted gross income was over $150,000 ($75,000 married filing separately).

There is also no penalty if the balance due is under $1,000. The 100%-of-last-year harbor is the practical one: look at last year’s total tax, divide by the number of paychecks, and make sure withholding gets there. A big one-time event (a Roth conversion, a stock sale, a bonus) is then covered no matter how large, as long as you pay the balance in April.

The estimated payments page covers the quarterly route for people with no withholding to adjust.

A Worked Example

Colorado

Colorado withholding is computed from your federal W-4 unless you give your employer Colorado’s own form, DR 0004. The Colorado form is optional and most employees never need it; the federal entries produce a reasonable Colorado amount at 4.40%. File a DR 0004 if you have large Colorado-only subtractions (the pension subtraction, for instance) or if your federal W-4 has extra withholding that would over-withhold Colorado as well. Colorado has its own underpayment penalty with a similar 90%/100% safe harbor and its own estimated-payment form, DR 0104EP, for those without withholding.