As the end of the year approaches, it is wise to do a quick tax withholding checkup. Make sure you have the correct amount of taxes withheld now, so you do not get surprised with a high tax bill at the filing season.
Below are five examples regarding who would benefit from a withholding check-up:
• Taxpayers who received large tax refunds in past years
When you have too much tax withheld from your paycheck, you pay too much tax during the year, then you get a refund at the end. Double check and change your withholding now, so you have money upfront rather than waiting for a big refund. After all, IRS does not pay you interest for using your money during the year.
• Taxpayers who owed taxes in the past years
If you have too little tax withheld, you might owe money to IRS. Withholding too little tax can bring not only a big tax bill at the end, but you may also be subject to a penalty, as quarterly tax prepayments are required in certain situations.
• People with a second job
This includes people who work in the “sharing economy”. A “sharing economy” is income producing activity, such as renting a spare bedroom, provide car rides, or provide other goods or services for compensation. This means you receive income, even if you do not get a Form 1099 at the end of the year. All income needs to be reported to IRS and be taxable. As a “rule of thumb”, try to put aside about 30% from this income to cover your taxes at the end of the year. Beware, you may need to make quarterly estimated tax payment throughout the year if certain conditions are met.
If you also have a regular job besides the “sharing economy” activity, check the total amount of taxes you have withheld and make adjustments as necessary. This will ensure your withholding cover the total amount of the taxes you owe, based on your combined income from all your jobs and services provided.
• Taxpayers who make estimated tax payments
Some taxpayers need to make quarterly estimated tax payments throughout the year. This includes self-employed individuals, partners, and S corporation shareholders. If these taxpayers also work for an employer, they can avoid making these quarterly payments by instead having more tax taken out of their paycheck.
• People with a new job
Taxpayers who start a new job should check their withholding to make sure they are having enough taxes withheld. Their total withholding should cover the income tax owed from their new and old jobs combined.
To make sure their employer withholds the right amount of tax, employees can adjust their Form W-4. This takes time, so taxpayers should make adjustments as soon as possible so the changes can take affect during the final pay periods of 2017.
The IRS has several resources that help taxpayers determine if they are having the right amount of tax withheld from their pay.
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