Adjusting Your W-4
Though most people look to tax season with dread, there are also those who look forward to filing their return because they know that they are going to get a big tax return. Though it’s understandable to enjoy having Uncle Sam deposit a big chunk of change into your checking account or having him mail you a check, you need to understand that if that’s happening every year it’s because you’re having too much withheld from your wages. Whether you end up owing a lot of money every April or getting a lot of money back, when you are withholding the incorrect amount it’s a big mistake, and the fault probably does not lay with your employer but with you.
Owing money to the government is hard, and puts you at risk of penalties and interest owed. And when you pay too much, the check that they hand you may feel like a gift, but it actually is the government handing you back all the money that you gave them to invest, interest free, throughout the course of the year. Why would you want to do that? Wouldn’t you rather have the money in your own pocket, for you to invest for yourself?
The W-4 Mistake
The amount of money that your employer withholds in payroll taxes isn’t based on how much you make or some random rule. It is entirely based upon the information that you gave them when you filled out your form W-4. Remember that piece of paper that asked you how many allowances you were claiming? When you hand that form in, the information that you fill out is what determines how much money your employer is going to withhold for you.
The more accurate the information that you provide, the closer you are going to come to not owing money and not getting money back when tax time rolls around. The W-4 may look simple, but you actually need to know what you’re doing when you’re filling it out, and that means you need to know what other income you may earn, what deductions you may want to take, and what credits you may be eligible for.
Figuring out the W-4
The fastest and easiest way to get this right is to use the convenient W-4 calculator that the Internal Revenue Service has made available through its website. When you fill it out accurately, it helps you understand how many allowances you need to claim by asking you about all of those other elements that come into play.
You can update your W-4 information anytime, and to figure out what to change it to, all you need is the calculator, a copy of your most recent tax return, and your most recent pay stub. If you’re married, you should have your spouse’s pay stub too. You’ll be guessing at some of the numbers, but the more thought you put into it the more accurate your results will be.
Go through the form and fill it out until you are given the information that you should fill out on your W-4 form. Then you can download a copy of the form here, print it out with the new information, and hand it to your Human Resources department so that they can update your records.
Though the IRS calculator is designed to be easy, some people find that it doesn’t fit well with their individual circumstances. If you have trouble answering the questions or need help, don’t hesitate to go to a professional accountant to get the answers you need. It is also important to remember that the calculator is only meant for your federal taxes, and your state’s withholding may be entirely different.
The other thing you should do is make sure that once you’ve updated your information, you take the time to look at how much is actually being taken out of your paycheck each week. Some people find that Human Resources inputs it wrong or their company’s payroll system messes things up, and then they end up with trouble when it comes time to pay their taxes.
People who are self-employed are required to submit their estimated taxes on a quarterly basis. If you have a job where you are being paid by an employer as well as earning money on your own, the IRS calculator is probably not going to provide you with an accurate picture of how much you need to withhold – especially if you are trying to have your employer-paid job submit the taxes you owe through self-employment.
It is probably best to seek professional assistance in determining exactly how much you should pay through payroll withholding and how much you should submit for yourself quarterly. Please don't hesitate to contact our office for answers to this and any other questions you may have.
Have additional questions? Call us at 715-365-6512 for all your business taxes and accounting needs!