WITHHOLDING

• FILING BASICS
• AFFORDABLE CARE ACTS
• INCOME
• WITHHOLDING
• DEPENDENTS
• CREDITS
• DEDUCTIONS
• PAYMENTS
• IRS TAX CALENDAR
• TAX TIPS

Withholding

The federal income tax is a pay-as-you-go tax. You must pay taxes as you earn or receive income throughout the year, and then you can file your taxes traditionally or do your taxes online once the year is out.

There are two methods for paying taxes:

• Withholding
  • If you are an employee, your employer probably withholds income tax from your paycheck.
  • Income received from pensions, bonuses, commissions, gambling winnings, and other sources may also have income tax withheld from the amount you receive.
  • The amounts withheld are paid to the IRS on your behalf.
• Estimated Tax Payments
  • If you do not pay taxes through withholding, or do not pay enough tax through withholding, you may need to make estimated tax payments to make up the deficit.
  • Generally, people who are in business for themselves pay their taxes through estimated payments.
  • Tax on income received from dividends, interest, rents, royalties, and capital gains is generally paid through estimated payments.

If you do not have enough taxes withheld, or you do not pay enough in estimated taxes, you may be subject to a penalty for underpaying your taxes.

The IRS Withholding Calculator can help you determine if your withholding is appropriate for your income, dependents and other tax information.

If your income is low enough that you will not have to pay income tax, you may be exempt from income tax withholding. You may still be subject to Social Security and Medicare tax withholdings. You can claim an exemption from income tax withholding only if:

• For the prior tax year you received a refund, or were entitled to a refund, of all federal income tax withheld because you had no tax liability.
• For the current tax year you expect to receive a refund of all federal income tax withheld because you expect to have no tax liability.

For more information, see IRS Publication 505.

Form W-4

The amount of income tax your employer withholds from your pay depends on the amount you earn and the information you have provided your employer on Form W-4. Form W-4 includes information to help you and your employer determine the correct amount of tax to withhold.

When you start a new job, you must fill out Form W-4 and give it to your employer. If you need to change your filing status or number of allowances at any time, you should fill out a new Form W-4 and give it to your employer. You can submit a new Form W-4 whenever you wish to change your withholding. It is important to have enough income tax withheld to avoid an underpayment penalty when you file your tax return.

Since Form W-4 cannot account for all situations, you may need to factor additional circumstances when determining the correct amount of withholding. Some common situations that may cause incorrect withholding:

• You are married and both you and your spouse work.
• You have more than one job at a time.
• You have non-wage taxable income (interest, dividends, alimony, etc.).
• You will owe additional amounts with your return (self-employment tax, etc.).
• Your earnings exceed $130,000, or $180,000 if your filing status is married filing jointly.
• You only work part of the year.
• You change the number of your withholding allowances during the year.

Completing Form W-4

Marital Status – Married persons qualify for a lower tax rate by checking the “Married” box on Form W-4.  Check this box if all the following are true:

• Your filing status will be married filing jointly or qualifying widow(er).
• You will be considered married for the whole year.
• Neither you nor your spouse is a nonresident alien.

Withholding Allowances – The more allowances you claim, the lower your withholding rate will be. The number of allowances you can claim depends on:

• How many exemptions you can take on your tax return
• Whether you have income from more than one job
• What deductions, adjustments to income, and credits you expect to have in the tax year
• Whether your filing status will be head of household
• If your filing status is married filing jointly, whether your spouse works and claims allowances on his or her Form W-4

Penalties

If you deliberately and knowingly make false claims on your Form W-4 in an attempt to reduce or eliminate proper tax withholding, you may have to pay a penalty of $500 if:

• You make statements or claim allowances on your W-4 that reduce the amount of tax withheld.
• You have no reasonable basis for the statements or allowances at the time you fill out the W-4.

There is also a criminal penalty for supplying false information on your W-4. The penalty upon conviction can be a fine of up to $1,000 or up to one year imprisonment, or both.

An error or honest mistake will not result in these penalties.

For more information, see IRS Publication 919 and Form W-4.