Are you stunned by how much you owed in taxes this year? If so, it may mean that your withholding needs to be adjusted. Withholding is the amount of federal income tax that your employer withheld from each of your paychecks. When not enough tax is withheld, taxpayers end up owing more come tax time. On the other hand if too much tax is withheld, you will have to wait until your refund arrives to get that money back.
To prevent this, the IRS recommends all taxpayers perform a “paycheck checkup” to ensure that the correct amount of tax is withheld for their specific situation. To help you, they have provided a Withholding Calculator to determine if you need to fill out a new Form W-4 to give to your employer.
When to Perform a “Paycheck Checkup”
The IRS suggests checking withholding during these times:
- Early in the year
- When the tax law changes
- When you have life changes, such as:
- Lifestyle – Marriage, divorce, birth or adoption of a child, home purchase, retirement, filing chapter 11 bankruptcy
- Wage income – You or your spouse start or stop working or start or stop a second job
- Taxable income not subject to withholding – Interest income, dividends, capital gains, self-employment income, IRA (including certain Roth IRA) distributions
- Adjustments to your income – IRA deduction, student loan interest deduction, alimony expenses
- Itemized deductions or tax credits – Medical expenses, taxes, interest expense, gifts to charity, dependent care expenses, education credit, child tax credit, earned income credit
The Withholding Calculator
Be mindful, though, that you will be prompted to answer a series of questions regarding your tax situation so it will take a few minutes. Before using the calculator, the IRS advises that you gather your most recent pay stubs and tax returns to ensure that you are providing the most accurate and up-to-date information as possible. The more precise your figures are, the more accurate results you will receive by using the calculator.
Additionally, the calculator is completely safe to use. You will not be prompted to input any sensitive information such as your name, bank account number, Social Security number, or address. This ensures that the information entered will not be saved or used against you.
Once you have completed all the prompts, use your result to determine whether or not you should adjust your withholding on your Form W-4. If so, submit this to your employer as soon as possible.
If you have any questions regarding withholding for yourself or for your employees, contact us!