It's easy to sidestep withholding problems if you stay on top of what comes out of your paycheck and adjust it as necessary. Your goal is to claim all of the W-4 allowances you are entitled to so that your withholding will come as close as possible to your actual tax liability.
Check early, check oftenYou can change your withholding at any time, so check early and check often to make sure you are withholding the correct amount. When you get your first paycheck of the year, you can see what amount was taken out and multiply it by the number of pay periods to get an idea of what your final withholding will total.
In April, after you file your taxes for the previous year, you'll get a better picture of how precise your withholding calculations were. If they were on the mark, and your circumstances haven't changed substantially, then you're OK. But if you owed a lot or got a big refund, you need to adjust your withholding. Likewise, if you got married, divorced, had a child, your spouse stopped or started working, or you bought a house, you need to refigure the amount you have withheld.
Common reasons to adjust withholding:
- Got married or divorced
- Had a baby
- Bought a house
- Spouse stopped or started working
- Added second job
- Nonwage income (interest, dividends, inheritance, etc.)
Throughout the year, you also need to be aware of any income you get from sources where there is no withholding. This includes nonwage income, such as interest, dividends, capital gains or retirement plan distributions. If this increases dramatically, you need to increase your withholding amount or make estimated tax payments.
Year-end added cash paymentsIf you find as the year winds down that you haven't had enough withheld and you should have been making estimated tax payments each quarter, you can avoid a possible penalty by asking your employer to withhold extra money besides your withholding. Simply file a new W-4, and on line 6 include the amount of money you want taken from your check each pay period.
If you do use this cash option at the end of the tax year, be sure to file a new W-4 in January. By making the appropriate allowance adjustments, you'll ensure that your withholding is paid throughout the year and you shouldn't find yourself in an end-of-year tax crunch again.