Time for a Year-End Tax Withholding Checkup by Nancy M. Valdes, CPA
Posted on December 01, 2017 by Nancy Valdes
As the end of the year approaches, individuals have a very limited amount of time to avoid an unexpected tax bill in 2018 by adjusting the amount of tax withheld from their salaries and paid directly to the IRS on their behalf.
Under the U.S.’s pay-as-you-go system of taxation, individuals pay most of their taxes during the year, as they receive income. These taxes can be paid either through quarterly estimated payments or, in the case salaried workers, by having their employer withhold income taxes automatically from their paychecks. The amount withheld will depend on an individual’s taxable earnings as well as his or her marital status, number of dependents and qualifying credits and deductions. Therefore, it is recommended that taxpayers annually update their W-4, Employee Withholding Allowance Certificates, to correspond with life events, such as marriage, divorce, death of a spouse, birth of child or having a child turn 19 (or 24 if he or she is a full-time student), which will affect the amount of taxes their employers withhold. In addition, the IRS recommends that the following taxpayers also consider conducting withholding checkups throughout the year.
- Taxpayers who received large tax refunds in prior years. While taxpayers are often happy to receive a refund from the IRS, it may mean that they had too much money withheld from their pay during the year. Rather than giving earnings to the government in what could be considered an interest-free loan, taxpayers can instead change their withholding and have more money from their pay go directly into their pockets.
- Taxpayers who owed taxes in years past. Just as individuals can have too much tax withheld from their paycheck, they may have too little withheld, which can lead to both a tax bill and an additional penalty.
- Taxpayers with more than one job. In today’s sharing economy, individuals who earn additional income from car driving services, such as Uber or Lyft, or who rent out rooms or apartments via Airbnb or other vacation rental service, must carefully check the total amount of taxes they have withheld to ensure it covers the total amount of taxes they owe based on combined income from all their jobs.
- Taxpayers who make estimated tax payments. Self-employed taxpayers, partners or S Corporation shareholders who make quarterly estimated tax payments throughout the year but who also work for an employer, should consider whether they can have more tax taken out of their salary and forego the estimated tax payments.
- Taxpayers with a new job. The total amount of tax an individual has withheld from the salary from a new job must consider the income taxes they will owe from both the new and old jobs combined.\
To avoid a tax liability surprise next year, taxpayers may complete and submit to their employers a new Form W-4 before the end of the year in order to adjust the amount of federal income taxes taken from their final paychecks in 2017.
About the Author: Nancy M. Valdes, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with U.S. and foreign-based entrepreneurs and closely held businesses to manage cash flow, protect assets and maintain tax efficiency. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.