The True Cost of Getting Withholding Wrong
The average federal tax refund in 2023 was $2,753. Most people see this as a bonus — but it's the opposite: you overpaid by about $230 per month throughout the year.
The IRS issued $334 billion in refunds in 2023, averaging $2,753 per return. Source: IRS Filing Season Statistics (2023) — Source
That money could have been earning interest, reducing high-rate debt, or sitting in your emergency fund. Instead, it was an interest-free loan to the federal government.
How the W-4 Works
Your W-4 tells your employer's payroll system how much federal income tax to withhold. The 2020 redesign replaced the old "allowances" with:
Step 1: Filing status Step 2: Multiple jobs or spouse who works Step 3: Dependent credits Step 4: Other income, deductions, additional withholding
About 50% of workers have not updated their W-4 since the 2020 redesign, leaving many with inaccurate withholding. Source: American Payroll Association (2022) — Source
When to Update Your W-4
- New job or significant raise
- Marriage or divorce
- Having a child
- Buying a home
- Taking on significant freelance income
- Major capital gains
For side income: request additional flat-dollar withholding per paycheck in Step 4(c) instead of making quarterly payments.
About 30 million taxpayers underwithhold each year. Source: GAO Report GAO-19-628 (2019) — Source
See also: paycheck tax calculator, IRS tax estimator, and the tax estimator guide.
Get Started with Avenue to track your withholding against your projected liability.