Check Withholding Now to Avoid Surprises at Tax Time
Ernie Neve, CPA
July 25, 2017
The federal income tax is a pay-as-you-go system. Employers generally withhold tax from workers’ wages. Taxpayers also often have taxes withheld from certain other income including pensions, bonuses, commissions and gambling winnings.
People who do not pay tax through withholding, like the self-employed, generally pay estimated tax. In addition, those who earn income such as dividends, interest, capital gains, rent and royalties are usually required to make estimated tax payments.
Each year, because of life events like changes to household income or family size, some people get a larger refund than they expect while others find they owe more tax.
To prevent a tax-time surprise, the IRS offers these tips:
1) New Job. When starting a new job, an employee must fill out a Form W-4, Employee's Withholding Allowance Certificate. Employers use this form to calculate how much federal income tax to withhold from regular pay, bonuses, commissions and vacation allowances. The IRS Withholding Calculator tool on IRS.gov is easy for taxpayers to use to figure how much tax to withhold to avoid surprises.
2) Estimated Tax. People who have income not subject to withholding may need to pay estimated tax. Those expecting to owe $1,000 or more than taxes withheld from their wages may also need to make estimated tax payments to avoid penalties. The worksheet in Form 1040-ES, Estimated Tax for Individuals, helps to figure the tax.
3) Life Events. A change in marital status, the birth of a child or the purchase of a new home can change the amount of taxes a taxpayer owes. The Managing Your Taxes After a Life Event page on IRS.gov provides resources to explain the tax impact of these changes. In most cases, an employee can submit a new Form W–4 to their employer anytime.