Is Your Tax Withholding on Track for the Year? by Andreea Cioara Schinas, CPA
Posted on August 08, 2017 by Andreea Cioara Schinas
With half of the year behind us, taxpayers should take a few moments to check their withholding allowances, and estimated taxes if self-employed, to ensure that the proper amount of federal income tax is taken from their paychecks. When not enough tax is withheld or paid in, you may end up with a significant tax bill next year. Too much tax liabilities taken out of your paycheck may result in a tax refund in 2018, but it also means that you are receiving unnecessarily smaller paychecks and less money in your pocket in 2017.
Self-employed taxpayers who either do not pay tax through withholding or do not pay enough tax that way may be required to pay their estimated fair share of tax throughout their year. These quarterly estimated tax payments include not only the amount one owes in federal income taxes, but also his or her liabilities for self-employment tax and the alternative minimum tax (AMT). Should individuals miss an estimated tax payment, or determine that they underpaid their estimated tax liabilities during the year, they have an opportunity to make up for the discrepancy by increasing their salary withholding between now and the end of the year. This planning trick can also help taxpayers reduce or eliminate and interest-charges or penalties they will incur for failing to pay their estimated liabilities throughout the year.
The ultimate goal of a mid-year checkup is to provide taxpayers with enough time to make adjustments to their withholding and come as close as possible to a zero tax balance at the end of the year. This requires taxpayers to consider whether or not any of their life circumstances have changed, such as marital status or birth of a child, since they last provided their employers with Form W-4, Employee’s Withholding Allowance Certificate. These life changes and how they are reflected on a worker’s W-4 ultimately affect the credits, exemptions and other adjustments to income and tax liabilities that he or she may claim on his or her annual tax return. For example, the W-4 will inform employers whether to withhold a worker’s taxes at the single rate or at the lower married rate and how much to withhold based upon the number of allowances a worker claims.
To make a withholding adjustment, taxpayers simply need to complete a new Form W-4 and submit it to their employers, who will calculate the withholding amount based on the information contained on the W-4. While workers may select to have an additional taxes withheld from their paychecks with the hopes of receiving a refund next year, it is important to remember that the dollars you receive as a tax refund are actually a government repayment of an interest-free loan that you made to Uncle Sam with your own money. Rather than having the excess taxes taken from your pay, you could have put those dollars to work for you by investing in the public equity markets or an employer’s 401(k) retirement plan or health savings account, or even keeping the money in a low-interest-bearing bank savings accounts.
To ensure that the calculation of estimated tax payments and/or withholding tax is as close as possible to the true amount a taxpayer owes at the end of the year, individuals should seek the counsel of experienced tax accountants.
About the Author: Andreea Cioara Schinas, CPA, is a director with Berkowitz Pollack Brant’s Tax Services practice, where she provides corporate tax planning for clients through all phases of business operations, including formation, debt restructuring, succession planning and business sales and acquisitions. She can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000, or via email at email@example.com.