When should a taxpayer increase withholding on Form W-4?

A taxpayer should consider increasing their withholding on Form W-4 if they have income from sources that are not subject to withholding. This scenario may cause an under-withholding situation, where too little tax is deducted from the taxpayer's paycheck throughout the year. Non-wage income could include income from self-employment, rental income, interest, or dividends. Since taxes are not automatically withheld from these types of income, the taxpayer may end up owing a significant amount when they file their tax return, potentially resulting in penalties for underpayment.

In contrast, if a taxpayer has no other income sources, they might not need to increase withholding because their sole source of income may be adequately covered by current withholdings. Working only one job does not inherently require additional withholding unless the individual's tax situation dictates otherwise, such as having other income sources or expecting to owe taxes at the end of the year. Lastly, having a tax credit to claim could actually reduce the amount of tax owed rather than necessitating an increase in withholding; it does not directly relate to the need for adjusting withholdings on Form W-4.