Every year, you likely file your taxes and hold your breath to see if you will owe the IRS money or receive a refund. Whether you owe taxes or receive a refund may depend on how accurate your tax withholding was throughout the year.
While a refund might be a pleasant surprise, it often is hard for individuals to manage when they receive a tax balance due notice from the IRS.
What is Tax Withholding?
Your federal income taxes are due periodically throughout the year as you make income, often referred to as a “pay-as-you-go” tax. If you have an employer, they take estimated taxes from your paychecks to pay the government. This process is known as tax withholding.
Self-employed workers follow a similar system and, as their own boss, have to pay their estimated income taxes quarterly.
When tax season rolls around, the IRS will review your taxes and make any necessary adjustments. If you overpaid taxes, you’ll receive a refund. However, if you underpaid, you’ll receive a tax bill for the amount you owe.
How Much Tax Should Be Withheld to Avoid a Tax Bill with Penalties and Interest?
Most experts recommend that employers withhold taxes for 90% of the estimated income taxes expected to be earned for the year. This ensures employees are left in a pleasant middle ground. They aren’t overtaxed and also aren’t likely to be surprised by a huge tax bill.
While most people are concerned with avoiding a tax bill, it’s important to note that you also want to avoid overpaying taxes. Sometimes a tax refund can mean you overpaid the government for many months, and they got to hold onto that money instead of you being able to spend or invest it.
This is precisely why you want to ensure your IRS withholding amounts are as accurate as possible.
If you’re concerned your employer is withholding too much or too little taxes, you can use the IRS Tax Withholding Estimator calculator to verify the correct withholding amount. To use the withholding calculator, you’ll need your most recent paystubs and estimated income for the current year.
Can You Change Your Tax Withholding?
Yes, if you know that your IRS tax withholding is too little for the current year, speak to your employer and ask for the amount to be adjusted. Consider showing your employer the IRS withholding calculator results, so they understand why you are making the adjustment request.
Note that your employer withholds taxes based on the W-4 form you filled out when you started your position. If you complete the IRS withholding estimator and find that you’re significantly overpaying or underpaying your taxes, you may have made a mistake on your W-4. You will then need to resubmit it with the correct information.
If even after adjustments from your employer, your IRS withholding isn’t enough, you may have to make estimated tax payments. This can happen if you have a second job or earn income from additional sources, such as interest, alimony, capital gains, awards, dividends, prizes, and more.
Since your employer isn’t your only source of income, they won’t be withholding enough taxes to cover your other income.
Additionally, self-employed individuals and business owners must make estimated payments on their income tax every quarter. They must estimate how much income they’ll earn throughout the year, pay income taxes based on this assumption, and then sort the difference during tax season.
Is There a Withholding Tax for Unemployment Benefits?
Individuals receiving unemployment benefits may opt to have 10% withheld to cover their federal tax liability. This is given as an option to everyone receiving unemployment benefits, although individuals can choose to keep their entire payment.
The IRS strongly urges people to choose to withhold the flat 10%, so they don’t get an unexpected tax bill at the end of the year.
Ultimately, you want to review your paystub every few months to ensure your tax withholding amounts are correct. This one little step can help you avoid a large bill come tax season.
Need more help? Schedule a free call or get started below.
6 Simple Questions. Free Evaluation.
Join our Newsletter
Enter your email address to join our free newsletter. Get all the latest news and updates.