Income Tax Withholding and Estimated Tax Payments

Reading Time: 3 minutes

Are you anticipating a tax liability?

Didn’t ask your employer to withhold enough taxes? You may have a tax liability on your hands. A tax filer can end up paying more than what’s withheld based on their income and wage levels. You can avoid a potential tax liability by requesting your employer to withhold a bigger amount by making changes to your W-4 tax contributions.

 

Why do you need to check your tax withholding?

Check your tax withholding to avoid not having enough tax withheld from each pay period. You may be surprised to see that you owe a little extra to the IRS when it’s tax time if your withholding doesn’t match your filing status.

You can change your withholdings on your W-4 form with your employer, if necessary. This determines how much tax will be withheld from each paycheck. You may want to have less withholdings on your W-4 and have more taxes withdrawn from each paycheck. Or you may choose to receive a smaller refund when it’s tax time and pay less in taxes each pay period. When more tax is withheld from your paycheck, you’ll most likely receive a higher refund at tax time.

 

When to check your tax withholding?

It’s important to check your withholdings periodically. A few key times are at the beginning of the year, when there are tax law changes implemented by the IRS, and when you have lifestyle changes that may impact your filing status.

Lifestyle changes include:

• Marriage, divorce, birth of a child, buying a home or filing for bankruptcy
• Change in wage income while starting or stopping an additional job
• Change in income not subject to tax withholdings including self-employment, interest income, dividends and IRA
• Adjustable income deductions such as IRA, student loan interest or alimony paid.
• Itemized deductions or credits such as medical costs, interest costs, charitable donations, costs related to dependent care, earned income credit, educational credit, and child tax credit.

How to check your tax withholding?

If you need to adjust your current W-4 on file due to a lifestyle change, a withholding calculator at the IRS website can help guide you towards the proper amount of withholdings essential on your corrected W-4 form.

The amount withheld depends on:

• Your filing status
• Number of withholding allowances claimed. Please note that each allowance claimed reduces the amount withheld
• Additional withholding: An employee can request more amount to be withheld from each paycheck

Part 4(b) on the W-4 is completed to decrease or increase the individual withholdings.

To reduce your withholding, you can claim deductions other than the standard deduction on the Deductions Worksheet. A higher deduction (e.g. $20,000) would result in a reduced tax withholding.

What are the benefits of withholding more taxes vs. paying more taxes while filing?

The benefits of withholding more taxes from each paycheck is simple – you’ll owe less at tax filing time and receive a larger refund. You don’t have to worry about the time pressure to pay tax payments by the payment deadline (April 18th) because you’ve already made your monthly deductions accurately.

Generally, the more allowances you claim, the smaller the taxes that will be withheld from each paycheck. The fewer the allowances claimed, the larger the withholding amount, which may result in larger refund. The amount of additional income you choose to withhold from your paycheck can depend on your individual situation.

Some people prefer to claim more allowances and have less taxes withheld from each paycheck to put away those extra savings for monthly bill and rent expenses. Some people cannot afford to wait for a tax refund at the end of the year, so they’d rather pay more taxes when filing their tax return.

 

When are they due?

Tax filers who owe taxes after filing their tax return will need to make a payment. Penalties may be applied by the IRS for non-payment. The IRS deadline for payment without penalties is April 18th.

 

Who needs to make estimated payments?

Tax filers who are self-employed or independent contractors usually need to make quarterly estimated tax payments.  They are due in April, June, September and January of the following year.  If you expect to owe more than $1,000 in taxes, please refer to Form 1040-ES.