Welcome!
Hello there! If you're reading this, you probably won a decent amount on a game show. First off, congratulations! Second, probably everyone and their sister has asked you about paying taxes on your winnings. So you know you need to pay taxes. But when? It's tempting to say you don't need to pay taxes until the year after you receive the winnings (e.g. if you get a check from the game show in early 2025, you don't need to pay tax until April 15, 2026.) This is only partially true. The IRS does not like it when you owe a lot of tax and as such, has published rules about how much you must pay during the year to not be penalized for paying too little. The goal of this post is to help you figure out how to avoid that penalty. As a word of warning, this will get math-y. There's no way to avoid the math for this one.
Disclaimers
This wouldn't be a tax post without disclaimers! Here we go...
- This article is about federal tax only. You may need to do something similar for your state, or you may not. Each state varies.
- This is only about avoiding penalties for underpaying your taxes during the year. You will still have a large tax bill on your winnings.
- Remember you're not taxed on your winnings until you receive them. So if you go on a game show in 2025 but don't receive the winnings until 2026, you don't have to worry about any of this until 2026.
- This assumes your paychecks are steady throughout the year. If you get an occasional bonus, that is OK; just make sure you are always looking at a "normal" paycheck and not a bonus one when doing these calculations. Receiving a raise won't break this method either. However, if the amount you receive from "normal" paychecks varies throughout the year, you'll need to talk to someone to tailor the calculations for your case.
- I'm assuming you only have one job and that you keep it for the remainder of the year. This article won't handle the case where you have two or more jobs.
- This assumes you have a standard W-2 job. If you are self-employed (i.e. you get 1099s), then you need to pay estimated taxes during the year and those rules are different. This article does not apply to self-employment.
BTW, if you're familiar with the concepts and just need the calculations, you can skip ahead to the "Summary" at the very end of this article.
How to deal with under withholding
At a high level, you have four options for dealing with the under withholding caused by your game show winnings:
- Pay the penalty. The penalty is, as I type this in early 2025, 7% per year on the amount you should have paid but didn't. After you file your taxes, the IRS will happily calculate this amount for you and send you a bill; some people take this route because they didn't know or they want to avoid the hassle. I don't recommend it.
- Ask the IRS to abate the penalty mentioned above. They will sometimes do this if it's your first time underpaying tax, but there are no guarantees.
- Pay estimated taxes throughout the year. This mostly applies to people who are self-employed and don't have money withheld. If that's you, you probably already are paying quarterly estimated tax and know how to deal with this or have an accountant who can figure it out for you. Thus, as previously mentioned, this article will not handle self-employment.
- Adjust your withholding to avoid the penalty. That's what the rest of this post will be about.
An outline of the process
For those who like to see the big picture first, here's what we're going to do:
- Gather the needed documents.
- Calculate the minimum you need to withhold to avoid a penalty.
- Calculate how much extra you need to withhold per paycheck to get to that number.
- Adjust your W-4 to withhold that extra amount.
Step 1: Documents you will need
Before we continue, there are two documents you will need: a) your most recent normal paycheck (i.e. not from a bonus) from work and b) your federal 1040 that you filed early this year. If you used tax software to file your taxes, you should be able to download your 1040 as a PDF from their website. If you haven't yet filled out your taxes for last year, do that first and then come back to this article.
Step 2: Calculating your withholding target
Definition: withholding
Since so much of this process revolves around withholding, we should define that term. Withholding is the money your job takes from your paycheck and gives directly to the IRS without you ever seeing it. There are different types of withholding. If you look at a paycheck, you should see a tax section. It may look something like this:
Finding last year's AGI and tax liability
There are two numbers you need from your most recent tax return: your Adjusted Gross Income (AGI) and total tax liability for last year. Your AGI is effectively how much taxable money you made during the year before figuring in any deductions; your total tax liability is how much you were required to pay to the IRS. Do not confuse your tax liability with the amount you owed or had refunded in 2025! Your early 2025 payment/refund was your tax liability minus the withholding from your job(s) in 2024.
I'm typing this post in early 2025, so if you're reading this because you won a large prize in 2025, you will need these numbers from your 2024 federal 1040 form, which you filed in early 2025. (If you haven't yet filed your 2024 return, do that first, then return to this article.) To find your AGI, look for form 1040, line 11:
And to find your tax liability, look for line 24 on page 2 of your 1040:
The formulas to avoid a penalty
With your AGI and tax liability in hand, we can calculate your withholding target, which is a term I made up for this article to represent the amount you need to have withheld over the course of the year to avoid a penalty. Your withholding target depends on your tax liability and AGI. Here are the rules:
- If your AGI last year was $150,000 or less, then to avoid paying a penalty, the amount your job withholds from your paychecks during the year must meet at least one of the following criteria:
- Your withholding must be at least 90% of this year's tax liability. OR
- Your withholding must be within $1,000 of this year's tax liability, OR
- Your withholding must be at least 100% of last year's tax liability.
- If your AGI last year was $150,001 or more, then to avoid paying a penalty, the amount your job withholds from your paychecks during the year must meet at least one of the following criteria:
- Your withholding must be at least 90% of this year's tax liability. OR
- Your withholding must be within $1,000 of this year's tax liability, OR
- Your withholding must be at least 110% of last year's tax liability. (In other words, take last year's tax liability, add 10% to it, and round to the nearest dollar.)
If you had a windfall from a game show this year but not last, then your tax liability this year will likely be much higher than it was last year, and number 3 (100% or 110% of last year's tax liability) is very likely to be the least of the three amounts, and no matter what it's the only value of the three you know for sure at this point. Thus the rest of this post will focus on that option.
Examples:
- Your AGI last year was $75,514 and your tax liability was $8,454. Your withholding target is 100% of last year's tax liability, or $8,454.
- Your AGI last year was $153,222 and your tax liability last year was $26,312. Your withholding target is 110% of last year's tax liability, or $28,943 ($26,312*1.1; note you round to the nearest dollar).
Keep your withholding target handy. We will need it again soon.
Step 3: Calculate extra withholding per paycheck
We're almost ready to calculate how much extra you need to have withheld per paycheck. But first, we need to figure out how much you will have had withheld if you don't make any changes. In order to do this, you need to look at your last paycheck and you need to know how many more normal (i.e. non-bonus) paychecks you'll receive this year (consult a calendar if necessary.) There are two numbers from your paycheck you'll need:
The two numbers are how much was withheld from your last paycheck and how much has been withheld YTD (year to date). In the example above, they are $718.55 and $4,858.26 respectively. As mentioned above, we only care about federal withholding; we're not worried about Medicare, OASDI (Social Security), state withholding, or any other withholding.
Your anticipated withholding, which is a term I made up for this article to describe how much you will have had withheld by the end of the year if you don't change anything, can be calculated as follows:
Anticipated withholding = Withholding per paycheck * number of (non-bonus) paychecks left this year + YTD (year to date) withholding
Example:
Using the paycheck above, if that person has 19 more (non-bonus) paychecks left this year, their anticipated withholding is:
Anticipated withholding = Withholding per paycheck * number of (non-bonus) paychecks left this year + YTD (year to date) withholding
= $718.55*19 + $4,858.26 = $18,510.71
The extra withholding calculation
We can now calculate the extra withholding per paycheck. It is simply this:
Extra withholding = (Withholding target - anticipated withholding) / (# paychecks left this year - 4)
Then round this number up to the next dollar! If you round down, you risk withholding too little.
By the way, what's the minus 4 for in the denominator? It usually takes a couple of paychecks for HR systems to update your withholding after you submit your changes, so I'm accounting for that in the calculation.
What if your anticipated withholding is already greater than your withholding target? Great! If that's the case, then you don't need to do a thing. You're already withholding enough to avoid the underpayment penalty.
Example:
In the example above, let's say that person's withholding target is $21,232. Then:
Extra withholding = (Withholding target - anticipated withholding) / (# paychecks left this year - 4)
= ($21,232 - $18,510.71) / (19-4)
= $2,721.29/15
= $181.42
Then round up to $182.
Step 4: Adjusting your withholding
Now that you know how much you need to increase your withholding by, you need to update your W-4 with that number. Some companies allow you to do this on-line and some require you to go to your HR department and fill out a paper form. Either way, put the extra withholding amount in line 4(c) of the W-4:
Note 1: Do not change anything else about your W-4! If you don't know how you filled it out before, your HR department should be able to provide you a copy of your previous W-4 so you can fill out the new one identically except for the extra withholding.
Note 2: In case you weren't aware, "allowances" are no longer a thing when it comes to W-4s. They were removed in 2020.
And that's it! You have now set up your withholding to avoid an underpayment penalty. But there are some other things you need to be aware of.
Consequences to be aware of
Your paychecks will be lower
This is what "extra withholding" means. The company you work for will be taking that amount of money out of each paycheck and sending it to the IRS on top of the money they are already sending to the IRS on your behalf. For example, if you set "extra withholding" for $182, that means each of your paychecks will be $182 less than what they had been before you made the change. Make sure you plan for this!
You will still have a large tax bill next year
Since we only set your withholding to match last year's taxes, you will still have a large tax bill early next year thanks to your winnings. Save money to pay it! See below for suggestions on that.
Don't forget to reset your withholding next year
Make sure you set a reminder to fill out another W-4 early next January and set the "extra withholding" back to $0.
What about state taxes?
I mentioned at the beginning that this article was only going to cover federal taxes, but I would be remiss if I didn't mention at least something about state taxes. Here are the possibilities:
- You live in a state that doesn't have income tax. Rejoice! Just don't forget that if your game show taped in California, they're still going to want their cut even if you don't live there. If your game show taped in another state, you'll have to look up that state's rules.
- You live in a state that has an income tax but doesn't have under withholding penalties. Many states let you wait until next April 15 to pay the bill. In this case, save the money you'll owe your state separately from the money you'll owe the IRS.
- You live in a state that has an income tax and does have under withholding penalties. If this is the case, you'll have to look up how your state wants you to handle the extra payments during the year you'll need to make to avoid the penalties.
Filing your taxes with game show winnings
In case it helps, I wrote a separate article about how to file your taxes if you won on a California-based game show:
Summary
In conclusion, here's just the math if you need it again:
- Withholding target = 100% of last year's tax liability if your AGI (adjusted gross income) was $150,000 or less last year
OR - Withholding target = 110% of last year's tax liability if your AGI was $150,001 or more last year
- Anticipated withholding = Last (non-bonus) paycheck's federal withholding * number of (non-bonus) paychecks left in the year + YTD (year to date) federal withholding
- Extra withholding (per paycheck) = (Withholding target - Anticipated withholding) / (Number of [non-bonus] paychecks left in the year - 4)
- If this number is negative, then you don't need to do anything.
- Put that extra withholding in line 4(c) of a new W-4, keeping everything else in that form the same as the previous W-4 you filed.
- In January of next year, reset line 4(c) of your W-4 to $0.
Phew. That should do it. Let me know if you have any questions!
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