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Are you withholding enough from your paycheck?
Paycheck withholdings represent a huge part of how most American workers pay income tax and can help determine an employee’s tax liability each year. If you’re currently working through your taxes, you might be wondering: how much should I be withholding?
See How Much Money You Should Be Withholding
The answer can make a major difference on your return, so be sure to use the recently released IRS’s Form W-4, Employee’s Withholding Allowance Certificate. Check your numbers with this handy calculator to make sure you’re withholding enough.
What Are Paycheck Withholdings?
The US tax system is pay-as-you-go, which means employees have taxes withheld from, or taken out of, each paycheck. Money is withheld for Federal Insurance Contributions Act (FICA) taxes, like Social Security and Medicare, and federal, state, and local income taxes. The employer then sends these taxes to the IRS on a regular schedule. If you are self-employed, or your income is from mainly investments, you should be making estimated payments to the IRS each quarter to avoid penalties.
If you withhold too much from your paycheck – or you pay too much into your “holding” account – you’ll get a tax refund when you do your tax return. And if you withhold too little, you will have to send an additional payment by next Tax Day.
For the IRS, the ideal situation is to have taxpayers to end up with no refund, or balance due. This allows taxpayers to have full use of their money each year. However, there is no law against paying too much into your account and getting a refund each year. A major question you have to answer is: Do you want to be close to zero when you file, or do you want a refund?
The IRS calculator linked above can help you determine how much you need to withhold from your paycheck each pay period. The calculator works if you have more than one job or source of income in a household. You can work out your estimated income, filing status, and deductions for the year – and the calculator will tell you how much to put on each W-4.
While this method isn’t exactly perfect, it can help you to set up your budget for the year, make sure you don’t owe taxes next year, and help you plan for a refund by withholding additional money each pay period.
About the Author
Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 35 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.
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