How do I ensure accurate pay withholdings?
We frequently receive the question “how many allowances should I claim with my employer?” We wish the answer was a simple, exact number.
We are able to estimate the amount of taxes you will owe for any given year, but cannot tell you how that translates into specific allowances with your employer's payroll company.
This is because many factors come in to play regarding withholdings. Here are a few:
- The number of jobs you work
- When you started and stopped those jobs
- Your marital status & filing status
- Whether your spouse works
- Your deductions, adjustments to income, and credits for the tax year
- Income earned from Independent Contract/Self-Employment work
There are several ways to handle withholdings. Here are the most common methods used:
Have your tax preparer do a tax analysis based on your estimated income & deductions for the year. This projection will reveal your taxable income and corresponding effective tax bracket. You can then instruct your employer's payroll company to withhold specific set percentages on all income based on this tax bracket. NOTE: not all payroll companies have the ability to withhold based on percentages. If that's the case with your payroll company, You may have to look into withholding specific dollar amounts, or the "W4 Allowance Withholding" method below.
The above Percentage Withholding method is helpful for those who receive bonus/commission income, and for those who receive varying income from year to year. It is also helpful for those who also have a separate income from independent/side work as it makes it much easier to estimate quarterly tax payments.
This method requires you to use forms for the IRS (W4) and your specific state in order to designate the number of allowances you'll claim. You can find those forms in our Tax Center under "Paycheck Withholdings Forms". Be sure to complete all applicable worksheets on the forms. Then provide the forms to your employer.
OR, you can use the IRS’ Online Withholding Calculator Tool. Caution: this tool will not estimate correctly if you will be subject to alternative minimum tax, self-employment, or other taxes. In these cases, you will want to refer to IRS Publication 505 mentioned below.
To avoid surprises at tax time, IRS Publication 505 is the best resource for complete information on this withholding topic. Using this publication, you can estimate the total tax you'll owe on your return and compare that with the total tax you’ll withhold for the year.
As you can see, the topic of tax withholdings can be very involved. There is no one-size, fits-all answer. Contact us with any questions...we’re here to help!