About 90% of Americans pay their income taxes via payroll withholding.
If you are wondering whether you do or don't, chances are very good that that's how you pay your income taxes as well.
Essentially how this works is that every time you get a paycheck, a certain amount of money is withheld from your check by your employer.
The employer holds onto that money until it's time to give the money to The Treasury Department.
Depending on the amount of payroll taxes the employer owes, the time they get to hold on to the money before sending it to the government can be anywhere from one week to three months.
The amount your employer withholds is actually determined by you.
When you first started working, one of the several forms you filled out was a W-4 tax form.
Many people fill this out once, and leave it the way it is, but you are actually allowed to change this form at any time.
The way it works is that you tell your employer how many "allowances" you have.
Essentially, the more allowances you claim on form W-4, the less money your employer will take out of your paycheck to pay your Federal Income Taxes with.
On the first page of the W-4 form is a worksheet prepared by the IRS that allows you to determine how many allowances you have.
The worksheet is pretty self explanatory, and it is unlikely that your employer will help you fill out the form (not because they don't like you, but most are not tax experts and they don't want the liability if you make an error).
If you plan on being in the same financial situation next year, you should look at your current W-4 and look at your tax return to determine whether you will owe taxes or get a refund.
If you will make under $150,000 in 2010, you must make sure that you pay at least the total amount of income tax you owed for 2009 or 90% of the total income tax you end up owing for 2010 (whichever is lower) during the 2010 year.
If you don't end up doing that, you will end up having to pay hefty fines to the IRS in the form of interest and penalties.
So, if you owe a lot of money to the IRS in April, you need to make sure that you adjust your W-4 and decrease the amount of allowances, otherwise it's likely that you will owe fines for 2010.
If, however, you will be getting a big refund check at the end of this year, and you expect the situation to be the same next year (i.
e.
the refund is not due to a one-time tax credit or other major deduction) then you should increase the number of allowances on your W-4.
If this is the case, you are certainly allowed to keep it the same.
The IRS has no problem taking more money than they deserve and giving it back to you in April.
Essentially, you just gave them an interest free loan, and they will be happy to hold onto your money for you.
It is more financially sound, however, to increase your allowances so that you don't have to wait until April to get your money.
Some people, even knowing this, choose to forgo the possible interest and use the IRS as a forced savings vehicle.
While we don't agree with that technique, we certainly understand the logic behind it, and you need to determine the best method for you.
If you have any questions regarding withholding, please don't hesitate to contact us.
If your income is under $60,000 per year, we will assist you for free with setting up your allowances.
If you are wondering whether you do or don't, chances are very good that that's how you pay your income taxes as well.
Essentially how this works is that every time you get a paycheck, a certain amount of money is withheld from your check by your employer.
The employer holds onto that money until it's time to give the money to The Treasury Department.
Depending on the amount of payroll taxes the employer owes, the time they get to hold on to the money before sending it to the government can be anywhere from one week to three months.
The amount your employer withholds is actually determined by you.
When you first started working, one of the several forms you filled out was a W-4 tax form.
Many people fill this out once, and leave it the way it is, but you are actually allowed to change this form at any time.
The way it works is that you tell your employer how many "allowances" you have.
Essentially, the more allowances you claim on form W-4, the less money your employer will take out of your paycheck to pay your Federal Income Taxes with.
On the first page of the W-4 form is a worksheet prepared by the IRS that allows you to determine how many allowances you have.
The worksheet is pretty self explanatory, and it is unlikely that your employer will help you fill out the form (not because they don't like you, but most are not tax experts and they don't want the liability if you make an error).
If you plan on being in the same financial situation next year, you should look at your current W-4 and look at your tax return to determine whether you will owe taxes or get a refund.
If you will make under $150,000 in 2010, you must make sure that you pay at least the total amount of income tax you owed for 2009 or 90% of the total income tax you end up owing for 2010 (whichever is lower) during the 2010 year.
If you don't end up doing that, you will end up having to pay hefty fines to the IRS in the form of interest and penalties.
So, if you owe a lot of money to the IRS in April, you need to make sure that you adjust your W-4 and decrease the amount of allowances, otherwise it's likely that you will owe fines for 2010.
If, however, you will be getting a big refund check at the end of this year, and you expect the situation to be the same next year (i.
e.
the refund is not due to a one-time tax credit or other major deduction) then you should increase the number of allowances on your W-4.
If this is the case, you are certainly allowed to keep it the same.
The IRS has no problem taking more money than they deserve and giving it back to you in April.
Essentially, you just gave them an interest free loan, and they will be happy to hold onto your money for you.
It is more financially sound, however, to increase your allowances so that you don't have to wait until April to get your money.
Some people, even knowing this, choose to forgo the possible interest and use the IRS as a forced savings vehicle.
While we don't agree with that technique, we certainly understand the logic behind it, and you need to determine the best method for you.
If you have any questions regarding withholding, please don't hesitate to contact us.
If your income is under $60,000 per year, we will assist you for free with setting up your allowances.
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