subject: Avoid Excessive Tax Withholding [print this page] This summer, Internal Revenue Service issued a Summer Tax Tips to discourage individuals from over withholding or overpaying their withholding. A tax withholding is a calculation of the taxes you pay as you earn your income. For employees, it is an election made on a W-4 form. In the W-4 form, you select your filing status and your number of exemptions. The higher the number of exemptions, the higher is the withholding.
As a CPA in Philadelphia, I have asked many individuals and self-employed the same questions every year. Why pay more just to wait months before you can get it back? Most often, most employees and self-employed do this to pay for their summer vacation or a big-ticket item they want to purchase this year. It is based on their lack of ability to save money. While seem to be a great way to save, since it is automatically taken out of your paycheck or for self-employed, it is a payment you pay in increments, it is not the most efficient way to save. Overpaying a tax withholding is a tax-free loan to the US Treasury. In addition, there are delays in processing your refund. In tax season 2012, the IRS changed their E-filing process and has caused refund delays. It is not a guarantee that your refund will be there when you need it. Below are ways to change or identify when to change your withholding.
New Job.
Any new employees are required to fill out a W-4 form or Employees Withholding Allowance Certificate. Include only yourself and your dependents to ensure that your withholding is accurate.
Identify Life Changes.
Any employees can change their W-4 withholding through out the year. Simply download the form from the IRS website and submit it to your HR Department. Every HR personnel should know this form and could provide you an advice on how to correctly fill it out. There is also the IRS who you could call if you have some spare time.
Prepare your 1040-ES.
Every self-employed should have a withholding if they expect to pay more than $1,000 per year in taxes or you could calculate your withholding from your prior year tax returns. You can request that your CPA provide you a 1040-ES that was calculated from your prior year tax returns or you can have them calculate a withholding every quarter.
