Don't Give Uncle Sam A Free Loan
Are you a taxpayer who gets the majority of your income from your wages? If you are, and at tax time you end up either owing money or getting a very big refund, you need to understand that that’s not the way it’s supposed to work.
You’re supposed to prepare your return and everything is supposed to be even, with the correct amount of money being withheld throughout the course of the year. Though it’s tempting to blame your employer, the truth is that in most cases, the amount that they deduct from your paycheck and send to the government is based upon the information that you provide to them through your W-4 form.
And though you may enjoy the feeling you get when you receive that fat refund check in late spring, you need to remember that it’s not some kind of bonus: it’s your own money that you overpaid. You could have been spending it, or earning interest on it, but instead you gave it to the government and let them get the benefit throughout the year.
What’s a W-4?
The W-4 is that form that your employer gave you when you were first hired, that asked you how many allowances you wanted to claim. Most people scratch their heads and just blithely write down a number, and that’s where the mistake is made.
The W-4 is what directs your employer regarding the amount to withhold on your behalf, and in order for it to be correct you need to consider more than just how many people there are in your family. You need to think about any other income that you have, what deductions you take, and what credits you receive.
Calculating and Updating Your W-4
If the amount that you had withheld was too much or not enough, then you need to update your W-4, and the best way to do this is to go onto the Internal Revenue Service’s website and use their online W-4 calculator.
The calculator will walk you through a number of questions about income and expenses, guiding you to the correct number of deductions that you should take in order to have the proper withholding amount deducted for you.
To use the calculator, you only need a little bit of information, including your most recent pay stub, your spouse’s most recent pay stub if you file jointly, and a copy of your most recent tax return.
Take time when answering the questions the calculator will ask, as the more accurate your answers are, the closer your withholding will be to what it should be. The calculator will provide you with the opportunity to download and print out a fresh copy of a W-4 to fill out and give to your employer, or you can tell your employer that you need to update your tax information and they will provide you with a copy to fill out.
A Word of Warning
Though the W-4 calculator on the IRS’ website is meant to be straightforward, some people’s tax situations are more complicated than others, and it may be a good idea for you to talk to an accountant to make sure that you’re providing your employer with the correct information. It’s also important to remember that the information that you provide for the federal government may not necessarily apply to your individual state’s tax requirements.
It’s also a good idea to take a good look at the amount that your employer withholds after you’ve submitted the new W-4. For many people the shift will represent a change in the amount of money they have in their pockets, so you may need to adjust your spending, or want to increase your voluntary savings. You also want to make sure that the amount that your company’s payroll department is newly withholding reflects your intentions – otherwise you could end up in trouble when it comes time to file your next tax return.
If you are your own boss, you don’t have anybody withholding taxes for you: instead, you pay quarterly estimated taxes on your own behalf. Calculating the correct amount to withhold can be complicated, especially if you also have income from another source, or have a spouse who has income withheld for them or who is also self-employed. In this situation, your best bet is to talk to a tax professional who can closely examine all of the factors involved in your tax situation and help you to send in the right amount.
Contact us for Guidance
Whether you’re an employee who has taxes withheld for them, a self-employed individual, or some combination of the two, having the correct amount of taxes sent in throughout the year offers many benefits.
For assistance in making sure that everything is being done to your best advantage, contact our office today at (909) 581-9235.