America’s federal tax system is complicated, and it can be nightmarish for workers who don’t have enough money withheld. With inadequate withholding, the worker may find themselves with a sizable tax bill in the spring.
Avoiding such a complication is a priority for many people. However, it isn’t easy to know how much is enough when it comes to withholding. What do you do if you want to avoid a tax bill?
It’s vital to learn more about your paycheck and withholding. Each time you get paid, your employer furnishes a stub that contains detailed information. Among the data is your “gross pay.” From the gross amount, your employer withholds funds to pay federal income taxes, Medicare and Social Security. You may see other deductions on your pay stub health insurance premiums and state income taxes. After these deductions, you’re left with the amount on your paycheck or the net pay.
Several factors determine how much of your gross pay is withheld for federal income taxes. One of these factors is the information that you provide on your W-4. All new hires must complete a W-4, and you may provide an updated W-4 when life changes occur, such as a child’s birth. The number of dependents you have may change the number of allowances that you claim on your W-4. As the number of allowances you claim increases, your take-home pay increases too.
It’s not always wise to claim every allowance for which you are eligible. You may end up having too little money withheld, giving you a painful tax bill. That’s because other factors influence how much tax you owe.
One of the most impactful of these factors is your income. Your income classifies you into a tax bracket, which defines the highest tax rate that is charged on someone with your income. The U.S. uses a progressive system. This means that your federal tax liability increases as you earn more money. Example rates include 10 percent, 25 percent, 33 percent and 39.6 percent. Each percent is applied to only a portion of the worker’s income, not the total amount, so no one is paying the government 39.6 of their earnings.
Tax laws and tax brackets may change from year to year, which makes it necessary to periodically check to see if you’re having enough withheld. On the www.IRS.gov website, you’ll find a withholding calculator that will help you find a solid estimate of how much you should have withheld. You’ll need information from recent pay stubs and your last tax return to fill in the calculator. The more accurate the data you supply is, the more accurate your withholding estimate will be.
It is not easy for the average person to know whether or not they are having enough money withheld for federal taxes. Using the withholding calculator on the IRS website is an excellent place to start. From there, you may determine that you need to file a new W-4 with your employer to adjust your withholdings.
Jim Treebold is a North Carolina based writer. He lives by the mantra of “Learn 1 new thing each day”! Jim loves to write, read, pedal around on his electric bike and dream of big things. Drop him a line if you like his writing, he loves hearing from his readers!