Withholdings – You Can’t Just Set and Forget!
Every employee must fill out what is known as a W-4 form, which tells the employer the amount of tax to withhold from an employee’s paycheck. The form is based off of allowances, which are based on the IRS look up tables and used to figure out how much tax to withhold. Basically the formula is total tax deduction divided by personal exemption amount (acts like a tax deduction because it reduces your taxable income).
As you focus your energy on calculating the amount of tax you either do or don’t owe, the primary area you will be concentrating on is that of withholding. You will be asked to report on marital status, allowances you qualify for, and any extra withholdings to report.
There are key triggers that typically lead to withholding changes you should know:
- Change in income
- Change in household situation
- *Marriage – your household withholdings could go up or down depending upon whether your spouse is bringing in any income.
- *Divorce – your household income is affected and alimony is factored in.Whether you are on the paying or receiving end, there are specific forms to fill out relating to alimony. Note…if you are on the receiving end, you will be paying tax on it.
- Birth of children (equals new allowances, which reduce withholding)
A good practice to get into is to have a tax projection run every year to see where you stand from a tax standpoint. You can project your income and deductions based on what you expect for the upcoming tax year, and then use the tax rates for the corresponding year to predict what your tax will be. The last thing you want is to be surprised with a huge tax bill!!!! After that, you can go to the IRS web site to check your allowances using their online calculator.
It is easy to forget to check your withholding every year, but a large tax bill is a painful reminder you could have avoided if you would have taken 30 minutes out of your day to do the math.