Month: November 2025

Your tax withholdings, the amount your employer deducts from your paycheck for federal and state income taxes, play a big role in whether you owe money or receive a refund at tax time. Many people set their withholdings once and never revisit them, but life changes quickly, and your financial situation often changes with it. Adjusting your withholdings can help you avoid unpleasant surprises when you file your return or prevent the IRS from holding onto your money interest-free all year.

A Nashua couple had received a large tax refund the previous year. Concerned that their tax withholdings were not properly set up, they sought advice from the team at Merrimack Tax Associates.

Top Signs that Your Withholdings Should Be Revisited

You Owed a Big Tax Bill or Got a Large Refund Last Year

If you were surprised by the size of your tax bill or refund last year, that’s a major indicator your withholdings aren’t aligned with your actual tax liability. Owing money to the IRS means too little was withheld, while a large refund means too much was withheld throughout the year. Ideally, your goal should be to break even, getting a small refund or owing a small amount.

You Started a New Job or Changed Employers

Each employer is responsible for withholding taxes based on your W-4 form. If you’ve recently changed jobs, make sure you filled out your new W-4 correctly. If you’re working multiple jobs or your spouse also works, the combined income could push you into a higher tax bracket, meaning your withholdings may need to increase to avoid underpayment penalties.

You Got Married or Divorced

Marital status significantly affects your tax situation. Getting married might move you into a new tax bracket or make you eligible for certain deductions. Conversely, divorce can mean losing credits or dependents that previously lowered your tax bill. In both cases, updating your W-4 with your current filing status ensures that your withholdings accurately reflect your new situation.

You Had a Baby or Can No Longer Claim a Dependent

Having a child typically increases your eligibility for credits like the Child Tax Credit and the Earned Income Tax Credit. On the other hand, if your child turned 18, graduated, or is no longer

a dependent, your tax situation changes in the opposite direction. These shifts directly affect your tax liability, making it essential to adjust your withholdings accordingly.

You Took on a Side Gig or Freelance Work

Side gigs and self-employment income don’t have automatic tax withholdings. If you’re earning extra money outside your regular paycheck, you might need to increase your withholdings on your main job or make estimated quarterly tax payments. Ignoring this step could result in a large balance due at tax time.

When you experience one of these life changes, it is important to revisit your tax withholdings. The IRS W-4 form was designed to make adjusting your withholdings easier. A quick review once or twice a year, especially after big life changes, can help you avoid costly surprises and keep more of your money in your hands. The Nashua couple was able to make the necessary changes to their W-4 with their employers and can expect to have a more accurate amount of taxes withheld in the future.

As the year winds down, many employees look forward to well-deserved bonuses or long-awaited pay raises. While these rewards recognize your hard work, they can also come with some unexpected tax consequences. Before you start spending that extra income, it’s worth understanding how bonuses and salary increases are taxed, and what you can do to keep more of your money in your pocket.

A Hudson, NH resident was anticipating a large bonus from his employer at the end of the year. Before planning what to do with the money, he wisely checked in with Merrimack Tax Associates to get a better understanding of the tax implications.

Understanding How Bonuses Are Taxed

Bonuses are considered supplemental income by the IRS. That means they’re taxed differently than your regular wages. Most employers use one of two methods to calculate taxes on bonuses:

The Percentage Method:

Under this method, your employer withholds a flat 22% federal tax rate on your bonus. This rate applies no matter how large or small the bonus is. Keep in mind that this is just for federal income tax, you will still owe Social Security, Medicare, and state income taxes where applicable.

The Aggregate Method:

In this approach, your employer adds your bonus to your most recent paycheck and withholds taxes as if it were one large payment. This can push your income into a higher bracket temporarily, leading to a higher withholding amount. However, if your overall income for the year doesn’t land in that higher bracket, you may get some of that money back when you file your return.

Other Tax Factors to Consider

Bonuses and raises can have a ripple effect on other parts of your tax situation. Here are a few things to keep in mind:

Retirement Contributions:

A higher income might make you eligible to contribute more to your 401(k) or IRA. Contributing extra before the year ends can help lower your taxable income.

Tax Credits and Deductions:

Some tax credits, like the Child Tax Credit or Earned Income Tax Credit, phase out as your

income increases. If a raise or bonus pushes you above those thresholds, your eligibility could decrease.

Withholding Adjustments:

If you expect to receive a large bonus or have multiple income sources, adjusting your withholdings now can prevent underpayment penalties later.

A year-end bonus or raise is always a reason to celebrate, but it’s also an opportunity to plan wisely. Understanding how these extra earnings are taxed helps you make informed decisions about spending, saving, and withholding. By reviewing your tax situation now, you can turn that reward into a long-term financial advantage.

The Hudson resident now has a better understanding of how his end of year bonus will be taxed, ensuring that there won’t be any surprises when it is time to file his taxes.