Learn more about W-4 withholdings and how you can maximize your tax position…
As the new year and tax season advances, many have questions or concerns about their federal (and state) tax withholdings, and they want to know how they can more effectively manage those withholdings.
In this discussion TheWealthIncreaser.com will address how withholdings on income earned in the United States occur, so that you–or those whom you know can utilize the system to achieve more.
W-4 Employee’s Withholding Certificate
Your employer provides you the opportunity to elect withholding for income tax purposes upon hire, or upon request by you if you are a current employee. That opportunity could allow you the chance to adjust withholding amounts by changing certain elections and/or having additional amounts withheld.
By adjusting with your withholding amounts, you can get to a point where you have a designated amount withheld so that you can get a refund or owe–or increase the amount of the refund or amount that you will owe the IRS. Your withholding for the year would be displayed on your form W-2 that you get at tax time from your employer (usually in January or February).
Before 2020, you had to claim a certain number of withholding allowances on form W-4 (you could also pick zero). The amount of federal income tax withheld from your paycheck was then based on how many allowances you claimed. The more allowances that you claimed the less the IRS would withhold. Prior to the change you could claim fewer allowances than what you were entitled to if you wanted to increase your withholding, but you couldn’t claim more allowances.
Allowances are no longer allowed on the new form that went into effect in 2020!
Generally, upon hire you would complete Form W-4 so that your employer could withhold the correct federal income tax from your pay based on what you desire. If changes are needed, you can complete a new Form W-4 each year and particularly when your personal or financial situation changes. Depending on the size of your employer, the process would be done through your Human Resources or Payroll department–or if a small operation through your manager or other designated individual(s).
Key factors since the arrival of the new form now include:
Step 1: personal information (name, address, SSN) and Single, MFJ, or HOH election
Step 2: multiple jobs or spouse works election
Step 3: the number of qualifying children under age 17 multiplied by $2,000 and the number of dependents multiplied by $500 can be entered based on the amount calculated and if you plan on being eligible for other credits, the estimated amount can also be entered
Step 4: other income, deductions and extra withholdings (key step for adjustment from your current withholding), and additionally if you expect to have other income such as interest, dividends, retirement income and/or you expect to itemize you can include extra withholdings based on your own situation
Step 5: you would sign and date
The IRS now offers a tax estimator that many find helpful when deciding on their withholding amounts.
If you are self employed or have W-2 income you can elect to pay estimated taxes and if you choose this option, payments are expected to be paid to the IRS based on your income at intervals of April 15, June 15, September 15 and January 15 of the new year through the EFTPS (you set up online and in a week or so you will receive correspondence in the mail that allows you to finalize setup and start making payments) system or other arrangement that you can set up with the IRS that would allow you to make timely payments.
Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.
Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.
You may have to pay estimated tax for the current year if your tax was more than zero in the prior year. See the worksheet in Form 1040-ES, Estimated Tax for Individuals for more details on who must pay estimated tax.
You don’t have to pay estimated tax for the current year if you meet all three of the following conditions.
- You had no tax liability for the prior year
- You were a U.S. citizen or resident alien for the whole year
- Your prior tax year covered a 12-month period
You had no tax liability for the prior year if your total tax was zero or you didn’t have to file an income tax return!
For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.
To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.
Estimated tax payments are generally due:
- April 15 for income earned January 1 to March 31
- June 15 for income earned April 1 to May 31
- September 15 for income earned June 1 to August 31
- January 15 of the following year for income earned September 1 to December
If you are a business owner you may want those who you do business with to submit a W-9 form so that you can withhold taxes or report withholding or payments made to them based on their business identification number or social security number if a sole proprietor.
You too can use Form W-9 to provide your correct Taxpayer Identification Number (TIN) to the person or business who is required to file an information return with the IRS to report, for example:
- Income is paid to you.
- Real estate transactions.
- Mortgage interest you paid.
- Acquisition or abandonment of secured property.
- Cancellation of debt.
- Contributions you made to an IRA.
Learn more by going to the IRS website…
FICA
The Federal Insurance Contributions Act of 1935 was signed into law to allow money to be withheld to help establish and keep the social security system solvent and ensure that current recipients receive their payments. On your paycheck you will see Social Security withholdings (6.2%) up to a a wage limit which adjusts annually and Medicare withholding (1.45%) which is unlimited.
The current total tax rate for Social Security is 6.2% for the employer and 6.2% for the employee, or 12.4% total.
The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total.
The combined rate for Social Security and Medicare employer and employee rate is 15.3% total.
There’s a maximum wage base for Social Security taxes on earnings, above which no tax is levied. The wage base is set at $160,200 for 2023 and $168,600 for 2024. Again, keep in mind there is no wage base limit for Medicare taxes.
Other sources of income depending on type, may also be subject to withholding. Also be aware of taxation at the local and state levels as it is important to look at your taxes in a comprehensive or wholesome way and analyze from ALL sources–even when what are really taxes, go by other names.
Conclusion
It is important that you realize that taxation of income at this time in the United States appears here to stay, and if you have income you want to come up with a way to pay your taxes “as you earn” whether by w-4 withholdings through the payment of taxes through your payroll withholdings as you earn or through the payment of estimated taxes based on as what you earn throughout the year and pay at designated intervals in April, June, September and January.
By timely managing your finances and paying your taxes you can avoid large tax payments and penalties at tax time that could severely hamper your wealth building efforts.
By “planning in advance” you can manage your finances and taxes in a manner where you owe a little–or get a little back, thereby minimizing the financial stress in your life, preventing large losses due to fraud, investing what you would otherwise allow the IRS to hold and otherwise manage your finances more optimally. Also, don’t forget about the taxation of your assets upon sale, as many will be taxed at your ordinary income or the generally more favorable capital gains rate.
Your withholdings along with your standard deduction or itemized deduction amount, and other adjustments deductions and credits will play a large role in determining if you will owe or get a refund in this and the coming tax seasons.
Always realize that “even if you don’t have any income tax withheld” from your wages, you may get a refund if you are eligible for tax credits such as the Earned Income Credit, the Additional Child Tax Credit, American Opportunity Credit and other potential credits that you may qualify for. Therefore you would want to ensure that you file your taxes in a timely manner (you have a 3 year window to file, otherwise you lose the refund) as that can put you in better position to manage your money at the various stages of your life.
All the best to your withholding and wealth building success as you deserve nothing less…
Disclaimer – TheWealthIncreaser.com does not provide and does not intend to provide financial, investment, tax, or legal advice. Information contained in this article is for informational and educational purposes only. The inclusion of links to third-party content is not an endorsement by TheWealthIncreaser.com of such content or services but is designed to save you time. Please do your due diligence and use your discretion and additional independent research.
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