The Basics Of Tax Withholdings

Receiving a refund in April might seem like Christmas.  However, what if you were to learn that there is not much rejoice?  Sure, receiving an unexpected lump sum of money in the spring might be nice, but which option seems better? A refund for $1200 that you might spend in less than a month?  Or what about an additional $200 a month in your take home pay?   

When you get the tax refund, it is really just the IRS saying, “Thank your for lending the government interest-free money”.  I am willing to bet that you were unaware that you were loaning money to the IRS.  If you do get a refund, you are in fact lending the government and not receiving any interest.    

On the flip side, you could owe an additional amount in taxes.  If you discover that the amount you owe is greater than $100, then not enough money was being deducted from each paycheck.  Lowering your monthly take home pay by $100 or possibly more does not sound very appealing.  However, owing a large lump sum of money to the IRS probably sounds worse.     

Ultimately, the responsibility is yours to ensure that the IRS is taken the right amount from each paycheck so that you don’t owe taxes or are loaning it to the IRS.  When it is just a matter of income taxes, you are able to adjust the withholding amount from each paycheck.     

You are able to adjust the amount of federal tax withheld from each paycheck with the W-4 form.  Your human resource or payroll department is generally able to provide this form to you.  Alternatively, you may also download it from the website, www.irs.gov.  On this form, it is important that you mark your correct number of claimed exemption allowances.  This is to ensure that the right amount of income is withheld for federal tax from each paycheck. 

You may also specify an additional amount of withholdings from each paycheck.  To accomplish this, first you would calculate your tax liability using the tax schedule for the current year.  Then you would divide your total tax liability by the number of checks that you will receive for the year.  This final number is the total amount to be withheld from each paycheck.  If the current amount being withheld is less than this total amount, then you should increase the amount being withheld from each paycheck accordingly.  As with any tax questions or concerns, if you need assistance, you should always seek advice from a qualified tax professional.