Is Your Employer Withholding Enough?
Many employees assume their payroll department is withholding the correct amount of tax. Unfortunately, that’s not always the case.
Changes in tax laws, multiple jobs, a working spouse, dependents, bonuses, or simply an outdated Form W-4 can all result in too little federal income tax being withheld.
A quick review now can save you from an unpleasant surprise next April.
Here’s a simple way to check:
- Find last year’s federal tax return (Form 1040).
- Look at Line 24 – Total Tax. This is the amount of federal tax you owed for the year before considering withholding.
- Pull out your most recent pay stub and locate your year-to-date federal income tax withheld.
- Estimate what your total withholding will be for the year by dividing the year-to-date withholding by the number of pay periods completed, then multiplying by the total number of pay periods in the year.
- Compare that estimate to last year’s total tax.
If your income and tax situation are similar to last year and your projected withholding is significantly lower than your prior year’s total tax, there’s a good chance you’re underwithheld.
Keep in mind that this is only a quick estimate. If you’ve had changes in income, deductions, filing status, dependents, or other tax situations, you’ll want to do a more complete calculation.
The easiest way to determine whether your withholding is on track is to use the IRS Tax Withholding Estimator. Have a copy of your most recent pay stub and last year’s tax return available before you begin. The estimator will tell you whether you’re likely to owe additional tax or receive a refund and can even generate a completed Form W-4 with recommended changes. IRS Tax Withholding Estimator
If you need to increase your withholding, submit a new Form W-4 to your HR or Payroll department. They will update your payroll withholding so more federal income tax is withheld from your future paychecks. The IRS recommends reviewing your withholding at least once a year and whenever you experience a major life change, such as getting married, changing jobs, or having a child.
Gig Workers and Self-Employed Individuals Need to Plan Ahead
If you drive for a rideshare company, deliver food, freelance, own a small business, or receive other self-employment income, you generally don’t have taxes withheld from your payments.
That means you are responsible for paying your taxes throughout the year by making estimated tax payments.
One of the biggest misconceptions I hear is:
“I’ll just pay everything when I file my tax return.”
While you certainly can pay the balance due by April 15, the IRS expects taxes to be paid as income is earned—not all at once when you file your tax return.
If you wait until April to pay, the IRS may assess an underpayment penalty. This penalty is calculated similarly to interest and is based on the taxes that should have been paid throughout the year. Even if you pay 100% of your tax bill by the filing deadline, you can still owe this penalty because the payments weren’t made when they were due.
Estimated tax payments are generally due four times each year, making it much easier to stay current and avoid unnecessary penalties.
The easiest way to make an estimated tax payment is through your online IRS account. If you don’t already have one, you can create an account on the IRS website and submit your payment electronically.
Setting up an IRS online account can be a little frustrating the first time. The identity verification process and account setup require a few extra steps, but it’s well worth the effort. Once your account is established, making estimated tax payments is quick and straightforward. You’ll also be able to view your payment history, balances, and other helpful tax information all in one place.
You can create an online account and make estimated tax payments by visiting the IRS Online Account at https://www.irs.gov/payments/your-online-account. If you don’t already have an account, I recommend taking the time to set one up before you need to make your next payment.
Not sure whether you’re withholding enough or if you should be making estimated tax payments? We can calculate your projected tax liability, recommend any needed adjustments, and help you avoid an unexpected IRS bill next April. Contact LP Tax & Bookkeeping Pros today to schedule a tax planning review.
Ralph Pinney
LP Tax And Bookkeeping Pros, LLC
ralphp@lptaxandbookkeepingpros.com
www.lptaxandbookkeepingpros.com