How do you feel about providing the IRS with an interest-free loan? You may be doing just that if you fail to properly estimate your federal withholding. If you receive an income tax refund, you are essentially providing the government free use of your money. If you have to pay taxes when you file your return, however, you may be scrambling for cash at tax time and also owe interest and penalties.

Your goal should be to have enough taxes withheld from your paycheck so that you will not incur penalties when your return is due. This may mean you will owe money when you file your return but it should be a small amount. This goal can be reached by reading and understanding IRS Publication 505 and 919 , properly completing Form W-4 and providing an updated Form W-4 to your employer whenever there is a significant change in your circumstances.

Form W-4 Helps You Determine the Proper Withholding Amount

There are two factors that determine the amount of income tax your employer withholds from your paycheck:

√ The amount you earn in each payroll period

√ The information YOU provide to your employer on Form W-4

Form W-4 includes four types of information that your employer uses to figure your withholding:

√ Whether to withhold at the single rate or at the lower married rate

√ How many withholding allowances you claim

√ Whether you want an additional amount withheld (this is optional)

√ Whether you are claiming an exemption from withholding

Completing the Worksheets Can Help in Claiming the Correct Number of Allowances

Understanding allowances is essential in understanding Form W-4 . The more allowances you claim, less taxes are taken from your paycheck. In other words, the more allowances you claim, the more cash you will receive on payday. The following factors determine your number of allowances:

√ The number of exemptions you claim on your federal tax return

√ The number of jobs you work

√ The deductions, adjustments to income and credits you expect to take during the year

√ Your filing status

√ Whether your spouse works

By utilizing the form’s worksheets , you should be able to figure the correct number of allowances to claim.

Don’t Forget to Check your Withholding

It’s always a good idea to periodically check your withholding. There are some situations when completing the Form W-4 worksheets may not guarantee the correct amount of tax withheld:

√ You are married and both you and your spouse work

√ You have more than one job at a time

√ You have nonwage income (i.e., interest, dividends, alimony, unemployment compensation or self-employment income)

√ You will owe additional amounts with your return, such as self-employment tax

√ Your withholding is based on obsolete Form W-4 information for a substantial part of the year

√ Your earnings are more than $130,000 if you are single or $180,000 if you are married

√ You work only part of the year

√ You change the number of your withholding allowances during the year

If you fall into any of these circumstances, IRS Publication 919 (How Do I Adjust My Tax Withholding?) can help you compare the total tax to be withheld during the year with the tax that you expect to owe on your return. It can also help you determine how much, if any, additional withholding is needed each payday to avoid owing tax when you file your return.

If you find that you need to make changes to your withholding, you can do so at any time by simply submitting a new Form W-4 to your employer.

Lisa Osborne
Office Administration
lisaosborne@mo-cpa.com