Under paying may result in penalties (oh no!) and over paying will result in a refund. If you had a huge tax bill then you may need to withhold more money from your check. If you had a huge tax refund then you may want to withhold less from your check.
What is withholding?
When we talk about withholding we are talking about all the money withheld on your check. You indicate how much to withhold by filling out your W4 form and giving it to your employer. You may fill out and hand in a new W4 at anytime.
Federal income tax
Social security
Medicare
If you are self employed your withholding won't be on a check it will be in the form of estimated tax payments.
Social security and Medicare are withheld automatically and you don't have power to alter those amounts. However, depending on your income bracket your federal income tax may or may not be automatically withheld.
Why does it matter?
If you aren't withholding or paying enough money throughout the year than you will have a big tax bill when tax season rolls around.
If you don't pay in time then you will be penalized. Tax penalties are charged interest (no!). So if you get slapped with a $10,000 tax bill and you can't pay in time- you'll get a penalty which will accrue interest. !!!
If you are overpaying then you will receive a large refund at the end of the year. A large refund might be fun to get but it means you could've had more take home pay throughout the year. Also the timing for refunds can be unreliable; with the IRS backlogged you might have to wait on that large refund.
How do I know if my payment is accurate?
Your withholding will be set up when you enter employment. But it's a good idea to check with your accounting department after a life change such as:
getting married
divorce
a new child
new home purchase
changes in tax laws
If you're not sure about your withholding, check out your last paystub. Take a look to see if there is any federal income tax being withheld. You may change how much is being withheld by adding an amount on your W4: line 4C
Here is a resource from the IRS to estimate your withholding amount. CLICK HERE
When do I need to fill out a W4V?
If you receive any government payment such as:
Unemployment compensation (including Railroad Unemployment Insurance Act (RUIA) payments),
Social security benefits,
Social security equivalent Tier 1 railroad retirement benefits,
Commodity Credit Corporation loans,
Certain crop disaster payments under the Agricultural Act of 1949 or under Title II of the Disaster Assistance Act of 1988
Dividends and other distributions from Alaska Native Corporations to its shareholders
Then you need to fill out a W4V. And you are going to send it to whoever is paying you NOT to the IRS.
I'm self employed, how do I "withhold"?
If you're self employed then you may not have the opportunity to withhold anything from a paycheck. Some people who are self employed do pay themselves on payroll and submit payroll tax, they are the exception.
But if you're self employed and not on payroll then you will need to pay federal income tax and self employment tax by submitting estimated tax.
You may submit estimated tax through the IRS direct pay feature or login to your account: Options.
Here is a summary from the IRS website: See more
Conclusion
Whether you need to pay a little more to avoid a large bill or hold onto money that is yours it's important to get your withholding amount accurate.
CLICK HERE for more resources to tax questions you may have. The IRS website is rich with information and videos to help you find what you need.
If you'd like to change your federal tax withholding all you need to do is download and fill out a W4 form and submit it to your employers. Download that form here.
Feel free to reach out to us if you have any further questions! 253-777-1106
This blog post is not a substitute for legal or financial advice.
All information was provided by the IRS.