With each paycheck that you earn, your employer withholds a portion of your income to cover your tax bill that will be due at the end of the year. What many people don’t realize is that you can control how much is withheld from your paycheck, and you can change this amount at any time.
To adjust your federal tax withholdings, you simply need to provide your employer with an updated W-4 IRS tax form that shows the new withholdings amount. The W-4 form includes a worksheet that helps you determine how many allowances to claim, but you are not obligated to use these numbers. You can claim as many allowances as you like, depending on whether you want more or less money taken out of your paycheck.
Deciding how much money to withhold requires some thought and understanding of how tax withholding works.
Understanding the End Result
The total amount of income taxes that you owe to the IRS will not change based on your withholding. However, withholdings provide a way to pre-pay your tax bill so that you are not stuck owing money on Tax Day.
Most people have more money taken out of their paychecks than necessary; 8 out of 10 taxpayers receive a refund every year. While it may be exciting to get this large payment after you file your taxes, remember that this is money that has been withheld from your paychecks throughout the year. Some people consider this the same as giving the government an interest-free loan for the entire year. Adjusting your withholding can make these funds available to you earlier, so that you have more cash flow all year long.
The trick is getting as close to your tax bill as possible, so that you have more money available throughout the year, but you don’t end up underpaying and then owing money to the IRS come tax time.
Estimating Your Taxes Due
Before you can determine how much to withhold from your paychecks in the coming year, you must estimate your taxes due. You can use multiple calculators online to estimate your total taxable income for the coming year. Then, you can refer to the tax withholding tables to determine how much money you may owe in taxes.
If you haven’t experienced any life events that may change your tax status — you’re still in the same job, you haven’t bought or sold a house, you haven’t had any children or a change in marital status — you can use your tax returns from last year to help estimate your tax payment.
After you have a good idea of how much money you may owe in taxes, you can use a tax withholding calculator to better estimate a reasonable withholdings amount. Remember that withholding less money from each paycheck could result in owing money on Tax Day.
If you’d rather play it safe and get a refund on Tax Day, you can adjust your W-4 so that you are claiming fewer allowances. In this case, more money will be deducted from your paychecks.
This process sounds easy enough at first glance, but some people have very complicated tax returns. Estimating withholdings can be increasingly challenging when you have multiple factors affecting your taxable income and overall tax liability. If you have any self-employment income, for example, it can be difficult to estimate how much you will end up paying in taxes.
If you have a complicated tax return, VTax can help make your tax returns easier. VTax tax professionals are licensed and credentialed, and able to assist with any tax situation. Learn more about VTax and find out how we can help you your maximum refund, guaranteed!