Every tax season we hear a familiar question: “Why didn’t my employer withhold enough federal income taxes from my paycheck and what can I do about it?” Why am I subject to underwithholding penalties?
What is form W-4 and why does my employer require me to fill it out?
The IRS form W-4 is used by your employer to calculate how much federal income tax to withhold from your paycheck per your instructions to the employer. If you fail to give the employer a W-4 form, the employer is required to withhold as if you were a single taxpayer with no dependents. The form only takes into account your filing status and number of exemptions you claim on this form. Thus, if you are married with two children and you are the sole breadwinner for your family and you fill out your W-4 as married with 4 exemptions, the amount of tax your employer withholds should equal the amount of tax due when you file your tax return.
I filled out the W-4 correctly, but why do I still owe the IRS?
The W-4 is an antiquated form that only takes into account your filing status, number of dependents you claim, and assumes the family has only one source on income. For many families, this is just not the case. If you have a second job, your spouse works, or you have other sources of income (interest, dividends, rental income, retirement distributions, social security, etc), you may find that there isn’t enough tax being withheld from your paycheck resulting in a balance due come April 15.
For some taxpayers, the exact opposite happens. They itemize their deductions and are entitled to receive tax credits and they find that they have large refunds due them each year.
How do I change my W-4 to have the proper amount of taxes withheld from my paycheck?
For many individuals, the only time they fill out the W-4 is when they start a new job. Employees rarely update this form. The IRS’s rules say that employees can change their W-4 as many times as needed during the year simply by submitting a new W-4 to their employer.
By claiming fewer exemptions or by selecting single as opposed to married on the W-4, more taxes will be withheld from your paycheck. There is no requirement that your W-4 mirror your tax return. If you file your tax return as married there is nothing prohibiting you from choosing single on the W-4 or less exemptions.
There are no maximum exemptions you can claim. The more exemptions you claim the less tax you will have withheld from your paycheck. Keep in mind, if insufficient taxes are withheld you could be subject to an under withholding penalty from the IRS.
What can I do if I fill out my W-4 as Single 0, and I still owe money to the IRS?
When you fill out your W-4 as Single with zero dependents your employer will withhold the maximum amount of taxes according the IRS tables. Unfortunately for some taxpayers, their withholdings still won’t be enough. There are three options you can choose.
- Specify a specific dollar amount you want withheld from each paycheck in addition to the amount the employer is already withholding. For example, you simply write in $100 on line 6 of the W-4 and your employer will withhold an additional $100 each payday.
- Pay estimated payments by completing IRS form 1040-ES. Estimated payments are usually submitted quarterly, but there is nothing prohibiting you from sending them in more frequently.
- Have your CPA prepare the proper withholding allowance for your W-4 to ensure that your withholdings will more closely match the amount of taxes that you need to pay to avoid IRS underpayment penalties and interest assessments.
Note: Because each individual’s tax situation is different, if you want to learn more about the IRS’s rules regarding proper tax withholdings, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation.
The peace of mind knowing that a tax return was prepared properly by using a tax professional for tax preparation is just one benefit of using a tax professional. Remember to work with your CPA during the calendar year if there are major life changing events or significant tax law changes that have occurred. An experienced tax professional keeps his clients informed of tax law changes and tax planning strategies.
You can also schedule a consultation at Click Here. To learn more about various tax and business services, visit Tax Preparation Services and Small Business Accounting Services
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