Tax Withholding 0
Tax is withheld on your income because our tax system is in actuality a “pay as you go” system. Many look at taxes as something due all at once in April, but that is simply not the case. What you pay in April is the shortfall between the total amount of tax that you owe and your year-long payments.
A withholding tax is an amount of money deducted straight from money you’d normally be paid, most often by employers, but occasionally by financial institutions, or if you’re lucky enough, from a large jackpot in a lottery. For the basic paycheck, the employer uses the withholding tax to pay taxes to a government. In the US, this can mean employers withhold taxes to pay the Internal Revenue Service, and in states where there is a tax on income, employers may also use a withholding tax to pay state taxes. Money is additionally withheld to make contributions to Social Security.
A withholding tax is imposed on salary and wage income, tip income, certain gambling winnings, pensions, and retirement distributions. You may avoid withholding on retirement payments. Withholding is also imposed on interest and dividends if you do not give your taxpayer identification number to a payer of interest or dividend income.
The amount of income tax withheld for your wage bracket depends on your marital status and the number of allowances you claim. You file a withholding certificate, Form W-4, with your employer, indicating your status and allowances. Without a Form W-4, your employer must withhold taxes as if you are a single person with no exemptions.
By February 2, 2009 (January 31, 2009, is on a Saturday), your employer must give you duplicate copies of your 2008 Form W-2, which is a record of your pay and the withheld income and Social Security taxes. If you leave your job during the year, you may ask your employer for a Form W-2 by making a written request within 30 days of leaving the job.
Withholdings Should Cover Estimated Tax
You may find that you are withholding too much tax or too little. You can adjust your withholding at any time by filing a W-4 with your employer. In fixing the rate of withholding on your wages, pay attention to the tests for determining whether sufficient income taxes have been withheld from your pay. A penalty will apply if your wage withholdings plus estimated tax payments (including prior year overpayments credited to current estimated tax) do not equal the lesser of 90% of your current tax liability or the required percentage of the prior year’s tax.
Taxes are withheld from payments made to you for services that you perform as an employee. By filing Form W-4, you claim allowances for yourself, your spouse, and dependents. The number of allowances claimed will either decrease or increase the amount of withholding. On Form W-4, you also may claim withholding allowances for itemized deductions and credits such as the child tax credit, child and dependent care credit, education tax credits, adoption credit, retirement savings credit, prior-year AMT credit, credit for the elderly and disabled, the foreign tax credit, credit for home mortgage interest, the general business credit, and earned income credit (if you have not filed for an advance payment of the credit on Form W-5).
If you need to increase your withholding, such as to cover investment or self-employment income, you can choose not to claim all of the allowances allowed on Form W-4. You can also direct your employer on Form W-4 to withhold an additional flat amount from each paycheck.
Withholding the Right Amount
You do not want to withhold too little from your pay and you do not want to withhold too much. You may need to withhold more to avoid a large tax payment or an estimated tax penalty when you file your return, especially if you have substantial income from investments or a business. On the other hand, if you have been receiving large refunds from the IRS, you may want to consider reducing your Form W-4 allowances to avoid over-withholding. Balance the loss of the use of your earnings during the year against the value of receiving a substantial refund check from the IRS after you file your return.
Working couples filing jointly should figure withholding allowances on their combined wage income, deductions, adjustments, and credits, but can divide the total number of allowances between them in any way they wish. On separate returns, the allowances must be figured separately.
If you work for two or more employers at the same time, you figure your withholding allowances based on the total income, and then split the allowances between the two jobs in any way you wish. Do not claim the same allowances with more than one employer at the same time.
File a new Form W-4 each year for withholding allowances based on your anticipated deductions and credits. Furthermore, you may have to file a new form to increase your withholding if withholding allowances you had been claiming are no longer allowed.
Starting a new job in the middle of a year presents a withholding problem. The amount of tax withheld from your paycheck is figured by taking your weekly pay and multiplying this by a 52-week pay period. To alleviate this problem, you may ask your employer to calculate withholdings on what is known as the “part year” method if your work days during the year are expected to be 245 or fewer. As an alternative, you may elect to claim extra exemptions on Form W-4, which has the same effect of reducing the amount withheld each week from your paycheck.
Changing Withholdings
Adjust withholding if there will be a significant change in the tax you owe for 2009. Credits such as the child tax credit, Hope scholarship credit, and lifetime learning credit may reduce your 2009 tax. By decreasing your withholding now, you can get the benefit of the lower taxes throughout the year. On the other hand, a withholding increase may be advisable if previously claimed deductions or credits will not be available to you, or if you expect an increase in nonwage income such as capital gains. Check the instructions to Forms W-4 and 1040-ES for 2009 to help you adjust your withholdings.
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