The 2025 tax law rewrote a lot of the math on your paycheck, and most people have not touched their W-4 since. If you set your withholding a few years ago and assumed it still fits, the middle of 2026 is the moment to look again. A quick IRS withholding adjustment for 2026 now can be the difference between a smooth April and a surprise bill, plus IRS penalties for insufficient withholding that quietly build up over the year. This is true whether you are a dual-income household in Oakland County, a tipped worker in the Detroit metro, or a retiree who just turned 65. Here is what changed, who it affects, and how to check your numbers before the year gets away from you.
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, changed several of the figures that drive how much tax comes out of each paycheck. The 2026 standard deduction rose to $32,200 for married couples filing jointly and $16,100 for single filers. New deductions arrived for tips, overtime, and older taxpayers. The IRS has updated the 2026 Form W-4 and its withholding methods to reflect all of this.
Here is the catch. A W-4 you filled out in 2022 or 2023 does not know about any of these changes. Withholding is a running estimate, and when the underlying rules move, an old estimate drifts off target. Some workers are now having too little taken out. Others are having too much taken out and giving the government an interest-free loan all year. Mid-year is the right checkpoint because you still have roughly half the year of paychecks left to correct course.
A few groups have the highest odds of being off in 2026.
Dual-income Michigan households are a classic case. When two people each fill out a W-4 as if their job is the only income, the combined withholding often falls short because it does not account for the second salary stacking on top. The IRS estimator and Step 2 of the W-4 exist specifically to fix this.
Tipped and overtime workers face a different trap. The headlines said “no tax on tips” and “no tax on overtime,” but those are deductions you claim on your tax return, not amounts your employer stops withholding. Your paycheck withholding on that income has not disappeared. If you assumed it did and dropped your withholding to match, you may have overcorrected.
Seniors age 65 and older gained a new deduction that can meaningfully lower taxable income. If your withholding or estimated payments still assume the old numbers, you may be paying in more than you need to.
Three OBBBA provisions matter most for a withholding checkup, and all three run for tax years 2025 through 2028, so they are in force for the 2026 return you will file in early 2027.
Tips. Eligible workers can deduct up to $25,000 of qualified tip income. The deduction begins to phase out once modified adjusted gross income passes $150,000 for single filers or $300,000 for joint filers. It is a deduction, not an exclusion, so tips still count for Social Security and Medicare tax, and Michigan may still tax them at the state level.
Overtime. You can deduct up to $12,500 (single) or $25,000 (joint) of the overtime premium required under the Fair Labor Standards Act, with the same income phase-out as tips. Only the extra “half” of time-and-a-half counts, not your full overtime paycheck.
Seniors. Taxpayers 65 and older can claim a $6,000 deduction per qualifying person. It phases out above $75,000 of modified adjusted gross income for singles and $150,000 for joint filers. This sits on top of the regular standard deduction and the existing age-65 add-on.
Because these are deductions claimed at filing, your employer keeps withholding on tips and overtime as usual. That gap between the headline and the mechanics is exactly why so many W-4s are now mis-set.
Michigan taxes individual income at a flat 4.25% for 2026, and the state does not automatically follow every federal change. That means income you deduct on your federal return, such as qualified tips or overtime, can still be taxable for Michigan purposes. Your Michigan taxable income may end up higher than your federal taxable income, and your MI-W4 withholding needs to reflect the state rules on their own terms.
If you live or work in a city with a local income tax, such as Detroit, there is a separate city withholding on top of the state rate. When you adjust your federal W-4, review your MI-W4 and any city certificate at the same time so all three layers stay in sync.
Florida has no state individual income tax, so there is no state withholding to adjust for our Delray Beach and Palm Beach County clients. Your checkup is purely a federal one. That simplicity cuts both ways. Because Florida withholds nothing at the state level, a federal W-4 that is even slightly off is the whole story, and there is no state refund to soften a federal shortfall. Florida workers with tips or overtime should be especially careful not to assume the new deductions have already been baked into their paychecks.
Consider Dave and Maria, a married couple in Royal Oak filing jointly. Dave earns $72,000 in salary. Maria earns $46,000 plus about $9,000 a year in FLSA overtime at the plant. When they each filled out a W-4 back in 2023, they both checked the box as if they were single-earners, and neither accounted for the other’s income.
For 2026, two things are working against their old setup. First, the second-income problem means their combined withholding has been running light for years. Second, Maria heard “no tax on overtime” and cut her withholding, expecting her employer to stop taxing that $9,000. Her employer never stopped, and the deduction only covers the overtime premium, not the full amount, so she overcorrected in the wrong direction and left the household even further behind.
The fix is not complicated. They run the IRS Tax Withholding Estimator together using both incomes, then Maria updates Step 2 and Step 4 of her W-4 so the household hits its real 2026 target. Doing this in July gives them the rest of the year to spread the correction across paychecks instead of absorbing it all in one April payment.
Michigan adds a second layer for Dave and Maria. Because the state does not automatically follow the federal overtime deduction, the $9,000 that Maria may deduct on her federal return can still be taxable at Michigan’s flat 4.25%. Their MI-W4 needs its own look, separate from the federal fix.
Now consider Ellen, age 67, living in Delray Beach. She takes about $34,000 a year from an IRA, collects Social Security, and works part-time at a restaurant where she earns roughly $11,000 in tips. Her modified adjusted gross income lands comfortably under the $75,000 single-filer threshold.
Ellen has two things going in her favor for 2026 that her withholding does not yet reflect. She qualifies for the $6,000 senior deduction, and her tip income is eligible for the tips deduction. Her IRA custodian is still withholding at the rate she selected years ago, and her restaurant is withholding on tips as it always has. Nothing is wrong with either, but together they are almost certainly taking out more than she will owe.
Her situation is also simpler than Dave’s and Maria’s in one important way. Florida has no state individual income tax, so there is no state form to reconcile. Her entire checkup is federal. She reviews her IRA withholding election and her W-4 at the restaurant, runs the IRS estimator with both income sources, and stops overpaying for the second half of the year instead of waiting for a refund in 2027.
These examples are illustrative and do not reflect any specific client. Individual results depend on your own facts. Prior results do not guarantee a similar outcome.
Start with the IRS Tax Withholding Estimator at irs.gov. Have your most recent pay stubs and last year’s return handy. If you are married and both work, run it with both incomes at once. Update your W-4 with your employer if the estimator shows a gap, and remember to review your MI-W4 if you are in Michigan.
A useful rule of thumb: to avoid an underpayment penalty, most taxpayers need to pay in at least 90% of the current year’s tax or 100% of last year’s tax through withholding and estimated payments, and that prior-year figure rises to 110% if your adjusted gross income was over $150,000. Withholding is treated as paid evenly across the year, which is why fixing your W-4 now is more forgiving than scrambling with an estimated payment in December.
Withholding math gets complicated fast when you layer a second income, tips, overtime, retirement income, and Michigan’s separate rules on top of the new federal deductions. Our team includes former IRS Revenue Officers, CPAs, and licensed Michigan attorneys who work through these calculations every day. If a missed adjustment has already turned into a balance you owe or an IRS notice, we can help you deal with the IRS directly through our Michigan tax resolution team or, for our Florida clients, through our Delray Beach tax help office. Levy & Associates handles civil tax matters only and does not represent clients in criminal tax matters.
If a withholding shortfall has already turned into a tax bill or an IRS notice, the team at Levy & Associates is ready to help. Our attorneys, CPAs, and former IRS Revenue Officers understand exactly how IRS collection works because many of us worked on the IRS side of these cases. Call us at 800.TAX.LEVY or contact us online for a free consultation.
Possibly, but not always in the direction you expect. The new deductions can mean you are now over-withholding, while a second income or a mis-set W-4 can mean you are under-withholding. Running the IRS estimator is the only way to know which side you are on for an accurate 2026 withholding adjustment.
No. It is a deduction you claim when you file, not a change to payroll withholding. Your employer still withholds on tip income, and tips remain subject to Social Security and Medicare tax. If you cut your withholding assuming otherwise, you may owe at filing.
Michigan taxes income at a flat 4.25% and does not automatically adopt every federal change, so amounts you deduct federally may still be taxable for Michigan. Check your MI-W4 separately, and factor in city income tax if you work somewhere like Detroit.
You could owe a balance plus an IRS underpayment penalty and interest. The good news is that withholding counts as paid evenly across the year, so increasing it now can reduce or erase the penalty. You can learn more about how these penalties work on our page covering insufficient federal withholding.
No. Florida has no state individual income tax, so your checkup is federal only. That makes getting your federal W-4 right even more important because there is no state layer to absorb a mistake.
Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.
There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.