The question of adjusting your payroll withholding is one that everyone who files a federal tax return needs to consider. Not paying attention to your selections can have an adverse effect on your finances. Withholding is one of those things that needs to be looked at yearly, preferably early in the year so that the correct amount of money can be withheld.
What can affect your withholding?
New tax laws are one of the things that can affect your withholding. With the recent tax law changes, tax rates were lowered thus the amount withheld from your pay was lowered. This may or may not be a good thing. Depending on your personal situation, you may end up owing money when it comes time to file your taxes. You should discuss the ramifications with your tax professional to determine if you need to have additional tax withheld.
Did you get married or divorced? Buy a home or add a dependent to your family? Has a spouse gone back to work or began a second job? All of these events will affect the amount of tax that you will owe and thus the amount that you need to have withheld.
If you have non-employment income, this will add additional money to your tax return and likely no tax was withheld from it. You need to take this income into account when determining what your withholding will be.
What are your withholding options?
The IRS recommends that you fill out a new W-4 every year even if there have been no changes in your life. The W-4 asks for basic information.
- Filing Status
- Additional Amount Withheld
Filing status is either married or single. You may, however, opt for the married but withhold at the higher single rate.
Allowances are figured on a worksheet that comes with the W-4. To have the maximum amount withheld, you choose zero. Otherwise, fill out the Personal Allowances Worksheet and if necessary the Deductions, Adjustments and Additional Income Worksheet and/or the Two-Earners/Multiple Job Worksheet.
The Additional Amount Withheld is an extra amount that will be added to the amount that your filing status and allowances would withhold.
When asking yourself if you should adjust your payroll withholding, take a good look at your last tax return. Did you get a large refund? You are having too much money withheld. Lower the amount you are withholding so that you will get more money in every paycheck. Letting the government have an interest-free loan is not in your best interest.
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If however, you had to pay the IRS when you filed your return, you need to withhold more. Ideally, you should break even. Taking to the knowledgeable staff at Chandler & Knowles CPAs about your payroll withholdings and all your other tax and accounting services can give you the confidence you need to make the correct selections. No one wants to pay more taxes than necessary and good advice can guarantee that doesn't happen.