W-4 Withholding Calculator
One of the major recommendations from the IRS is to use a W4 withholding calculator to perform what they refer to as a paycheck checkup. With the changes to the tax code in 2018, this is more important than ever.
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You Can Make Sure You’re Having Enough Withheld
The reason for the withholding calculator is to figure out your tax withholding from your wages. This will ensure that you’ve saved enough from your paycheck to pay off your tax bill when the time comes.
When you use the calculator, you’ll be able to protect against not having enough of your paycheck withheld for tax purposes. You’ll avoid being hit by a sudden and surprising tax bill that you can’t afford to pay all at once.
On the other hand, you may be able to ask that less tax is withheld upfront because you can claim a large tax refund, due to your circumstances.
Employees can use the calculator to figure out whether they need to submit a brand-new Form W-4 to their employer. You’ll also need the results from the calculator to fill in this form in the first place, so that you can adjust your withholding.
If you happen to have an income from a pension fund, you will need the calculator to complete Form W-4P, which will be submitted to the organization paying you.
Guide to Using the Withholding Calculator
To use the calculator, you’ll need certain pieces of documentation. For a start, the calculator will ask for an estimate of your income and your eligibility for the Earned Income Tax Credit and the Child Tax Credit. It only takes a few minutes to do, however.
First of all, you should have your most recent pay stub and your latest income tax return, including a copy of the last Form 1040 you completed.
The results from the calculator are entirely based on the accuracy of the information you provide. It also makes sense to return to the calculator later in the year, or as your circumstances change.
You don’t need to enter any of your personal details, such as your social security number or your name and address. The results from the calculator aren’t saved.
A Special Note on the Withholding Calculator
You should keep in mind that the withholding calculator will work for most, but not all taxpayers. If you have a more complex tax situation, you should look at IRS Publication 505 and follow the instructions there.
You may fall into this category if you pay self-employment tax, use the alternative minimum tax, or you have any tax to pay on unearned income.
Furthermore, the calculator can’t factor in long-term capital gains or any social security benefits that are taxable. However, to get around these limitations, you can estimate your non-wage income.
How to Change Your Withholding Amount
With the results from the withholding calculator, you can complete a new Form W-4 to change how much of your paycheck is withheld for tax purposes. The sooner you submit the new form, the sooner the changes will take effect.
On a side note, if you use the withholding calculator to make alterations to the amount of your paycheck that’s withheld, the IRS recommends that you review these limits at the beginning of the 2020 financial year.
If you alter your withholding in the middle of the financial year, it could impact your tax situation the following year, if changes aren’t made. You don’t want to have lower or higher withholding limits because you didn’t take a few minutes to review your withholding limits for the following financial year.
You should speak to your employer or a tax advisor if your tax situation is more complex or if you need help understanding any aspect of paycheck withholding.
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Frank Ellis is a Traverse City Tax Preparation Planner and published author. He has written tax and finance related articles for twelve years and has published over 1000 articles on leading financial websites.