Are You Withholding Enough?
by Cody Taylor
Have you ever gotten to the end of the year, filed your taxes and then been surprised by what you owe? One of the factors that can contribute to your surprise is not withholding enough taxes from your paycheck. If you are a W-2 wage earner (your employer takes taxes out of your paycheck) and your income profile isn’t very complicated you may be able to use the IRS Withholding Calculator to figure out the correct withholding level for you.
The IRS gives some tips for using the program:
- Have your most recent pay stubs handy
- Have your most recent income tax return handy
- Estimate values if necessary, remembering that the results can only be as accurate as the input you provide.
To Change Your Withholding:
- Use your results from this calculator to help you complete a new Form W-4, Employee’s Withholding Allowance Certificate
- Submit the completed Form to your employer
Even if you’ve always gotten a refund there may be reason to look into your withholding amount or whether you may need to make an end of year estimated payment to cover any tax liability if your situation has recently changed. Some scenarios include an increase in nonwage income (Interest, dividends, capital gains (ex. stocks), alimony or self-employment income), a change in marital status, you moved to a new state, gained or lost a dependent or maybe you simply had a change of income level recently. Nonwage income does not usually have taxes withheld so an increase from one year to the next can surprise people at tax time if they aren’t prepared for it.
Withholding information is especially important when you or your spouse is self-employed. The IRS Withholding Calculator is not recommended when your income profile contains alternative minimum tax, self-employment tax, or if you receive pass-through income in the form of a K-1(s). These more complicated situations may require an end of year tax projection to ensure your tax liabilities are covered.
If the IRS Withholding Calculator is not right for your situation and you need some additional assistance with end of year tax planning please contact our office for additional information.
Cody ([email protected]) is a staff in our tax department. He focuses on various closely-held family companies, and trusts.