Do You Owe Taxes? Or Did You Receive a Large Refund?
It’s nice to receive a large refund from the IRS, however, remember that means you are simply getting your own money back that was over-withheld in the first place. Logically, it would make more sense to put that money in the bank and be able to use it all year long instead of giving the IRS an interest-free loan!
If this refund is primarily coming from your wages, then you are telling your employer to withhold tax based upon the information you give them on Form W-4. It’s simple enough to update your W-4, however, this is where some taxpayers get it wrong as they might have other income, itemize their deductions or even qualify for certain tax credits.
Take a look at the IRS’s online W-4 calculator to help you determine the right amount of allowances to claim on your W-4. This calculator helps you take into account a multitude of issues, including itemized deductions, other income, tax credits, and tax already withheld.
Before using the IRS calculator, be sure you have the following information:
- Your (and your spouse’s if you file jointly) most recent pay stub
- A copy of your most recent income tax return
Caution: If you are uncomfortable using the IRS’s online calculator, don’t understand some of the terminology, or have multiple jobs or a working spouse, give us a call so we can assist you in determining the correct number of W-4 allowances. Also the federal W-4 allowances may not translate properly for your state withholding.
When you determined the filing status and allowances to claim using the calculator, you can download a copy of Form W-4 and give it to your employer. Don’t forget to double-check the withholding to make sure it is approximately what you had intended. It is not uncommon for errors to occur in an employer’s payroll department that could lead to unpleasant surprises at tax time.
Keep in mind that there are a multitude of possible combinations such as if you are self-employed and pay estimated taxes or if you also have salaried employment, etc. If this is the case, then the IRS withholding calculator is not suitable for your needs, and you will probably need professional assistance in determining a combination of estimated taxes and payroll withholding.
If you need assistance in preparing your W-4s and determining your estimated tax payments, contact Baldwin Accounting.