Dial in your W-4: withholding that fits owners and family on payroll

Who this is for

• Every W-2 employee, including S-corp owner-employees, employee-spouses, and kids on payroll.
• Owners with distributions or other non-wage income who’d rather cover tax through withholding than quarterly estimates.

The 2026 numbers

• Step 3 (2026 Form W-4): if total income is $200,000 or less ($400,000 or less married filing jointly), enter $2,200 per qualifying child under 17 and $500 per other dependent.¹
• Child tax credit: up to $2,200 per child, with a refundable portion up to $1,700. It starts to phase down above $200,000 of income ($400,000 MFJ). Valid SSNs are required.²³
• Estimated-tax safe harbor: pay at least 90% of this year’s tax or 100% of last year’s. Use 110% of last year’s if last year’s AGI was over $150,000 ($75,000 MFS).⁴

How to do it right

1. Two-earner household? Use Step 2(c). If there are only two jobs total, check Step 2(c) on both spouses’ W-4s. It’s generally more accurate when the lower-paying job pays more than half of the higher one. Otherwise, use the Step 2(b) worksheet or the IRS Tax Withholding Estimator.
2. Claim credits in Step 3 when your income is within the limits above. Above them, the credit phases down, so use the Estimator for your amount.
3. Cover distributions with Step 4(c). S-corp owners can add a flat extra amount per paycheck to cover tax on distributions and other income. Simple and steady.
4. Aim for the safe harbor. Compare your withholding, plus any estimates, to 100% or 110% of last year’s tax so you’re covered while income grows.
5. Kids on payroll fill out their own W-4. If they had no federal income tax liability last year and expect none this year, they may claim exempt. Exempt status is renewed by Feb 15 each year.⁵
6. Recheck mid-year and after big changes: a new baby, a raise, bigger distributions.

Have kids on payroll, or thinking about it? The hire-your-kids calculator shows the 2026 family math, and hire your kids covers the setup.

Run it by your CPA

A quick mid-year projection with your CPA can set your Step 4(c) number for the rest of the year.

Every business is a little different, so check with your CPA for your situation. Good CPAs are on your team, and they love an owner who shows up with the homework done.

More from Dad’s tax playbook

• When the S-corp election pays off: Payroll tax saved minus the cost of running an S corp. The two-column math and Form 2553 timing.
• Put your kids on payroll: By business type: when kids’ pay skips FICA, their standard deduction, and the Roth IRA angle.
• Put your spouse on payroll: Social Security credit in their name, their own 401(k) deferrals, and the QJV option.
• S-corp owner health insurance: W-2 Box 1 only, then Form 7206. One payroll setting, one form.
• The accountable plan: Get paid back for miles, phone and home office without it counting as wages.
• The Augusta rule: Rent your home to your company for real meetings, fewer than 15 days a year.
• The Solo 401(k): Two hats, two contributions: 2026 limits, deadlines and the S-corp angle.
• Work Opportunity Tax Credit: watch this space: Lapsed for 2026 hires so far. Where it stands, and the playbook if Congress revives it.
• PTET: let your business pay the state tax: How pass-through entity tax elections work around the personal SALT cap.
• S-corp reasonable salary by profession: pay ranges for 15 professions, the IRS factors and a one-page salary memo.

Payroll Dad is a cartoon run by a real small family business. This is general education, not tax advice for your situation.