Do you earn wages? Are those wages your main source of income? Did you received a very large refund — or worse, did you owed money? Maybe your employer is not withholding the correct amount of tax. Don’t get me wrong, it probably isn’t your employer’s fault. Sure, you like a big refund, but you have to remember you are only getting your own money back that was over-withheld in the first place. Why not bank it that money? Why not have access to it all year long instead of giving it to Uncle Sam as an interest-free loan?
Employers withhold tax based on the information you give them on Form W-4. To adjust your withholding you will need to give your employer with an updated W-4. The W-4 appears to be an easy form to fill out. Yet, this is where many taxpayers go wrong. The Taxpayer may often forget to take into account that they may have other income. Another thing they don’t realize is that they may itemize their deductions or qualify for various tax credits.
You can solve this problem by using the IRS’s online W-4 calculator. This tool helps taxpayers figure out the correct amount of allowances to claim on their W-4. It takes into account a variety of issues, including itemized deductions, other income, tax credits, and tax already withheld.
Before using the IRS calculator you will need the following:
- Your most recent pay stub
- Your spouse’s most recent pay stub, if you are filing jointly
- A copy of your most recent income tax return
- You will be required to estimate some values.
- Remember the results are only going to be as accurate as what you plug in.
Once you have determined the filing status and allowances to claim using the IRS calculator, download a copy of Form W-4. Also, download the Employee’s Withholding Allowance Certificate. Fill it in and give it to your employer.
Here’s a Tax Tip:
Once your employer has applied the new W-4 allowance, double-check the withholding. Why? You want to make sure it is close to what you had planned on. Errors are common when it comes to an employer’s payroll department. If an error happens, that could lead to unpleasant surprises at tax time.
You are self-employed, you say?
If you are self-employed, you generally pay estimated taxes instead of having payroll withholding. You may be self-employed as well as have salaried employment. Or, your spouse may have payroll income or be self-employed. There are a multitude of possible combinations. If so, the IRS withholding calculator is not suitable for your needs. You will probably need professional assistance in working through a combination of estimated taxes and payroll withholding.
Use Caution When Estimating your W-4
You may not be comfortable using the IRS’s online calculator. You may not understand some of the terminology. Perhaps you have multiple jobs or a working spouse. Don’t worry. You can get professional help. Give Alex Franch, BS EA, a call at 781.849.7200. Alex is an enrolled agent with the IRS. He can help you determine the correct number of W-4 allowances, as well as estimate your tax payments. This can be very important, since the federal W-4 allowances may not translate properly for your state withholding.