As the end of the year approaches, the IRS encourages taxpayers to consider a tax-withholding checkup. When taxpayers take a close look to make sure the right amount is withheld now, they can avoid unexpected tax bills next year. Here are five examples of taxpayers who would benefit from a withholding check-up:
1. Taxpayers who received large tax refunds in past years. When taxpayers have too much tax withheld from their paychecks, they pay too much tax during the year. They can change their withholding to have money upfront rather than waiting for a bigger refund.
2. Taxpayers who owed taxes in years past. Taxpayers with too little withheld might owe money. Under-withholding can lead to both a tax bill and an additional penalty.
3. People with a second job. This includes people who work in the sharing or “gig” economy. Taxpayers who work more than one job should check the total amount of taxes they have withheld and make adjustments as necessary. This will ensure their withholding covers the total amount of taxes they owe, based on their combined income from all their jobs.
4. Taxpayers who make estimated payments. Some people make quarterly estimated-tax payments throughout the year. This includes self-employed individuals, partners, and S corporation shareholders. If these taxpayers also work for an employer, they can forgo making these quarterly payments by instead having more tax taken out of their pay.
5. People with a new job. Taxpayers who start a new job should check their withholding to make sure they are having enough taxes withheld. Their total withholding should cover the income tax owed from their new and old jobs combined.
To make sure their employer withholds the right amount of tax, employees can adjust their Form W-4, Employee’s Withholding Allowance Certificate. In many cases, this is all they need to do. The employer uses the form to figure the amount of Federal tax to be withheld from pay. This takes time, so taxpayers should make adjustments as soon as possible so the changes can take effect during the final pay periods of 2017. At the same time, NYS employees may want to adjust a similar form for NYS, Form IT-2104, to address NYS income tax concerns.
The IRS Publication 505, “Tax Withholding and Estimated Tax,” will help taxpayers determine if they are having the right amount of tax withheld from their pay.
Barry Lisak is an IRS Enrolled Agent, meaning that he has passed special U.S. Treasury Department exams that qualify him to represent clients dealing with audits or tax-resolution cases. Any questions can be directed to him at (516) TAX-SAVE, or email@example.com.