If you work a “traditional” job where you’re paid through an employer and Federal, state, and Medicare taxes are withheld from your paycheck, you’ll need to fill out a W-4 form and turn it in to your Human Resources department upon being hired. Your W-4 form will indicate how much money you’d like to be withheld from your taxes with each paycheck, which can help to ensure that you don’t end up owing money to the government when it comes time to file your tax return. Still, knowing how many exemptions to take on a W-4 form can be a challenge; read on for some helpful tips.
Overpaying vs. Underpaying
With each exemption you claim on your W-4, your employer will take out less money in taxes from your paychecks. Some people like to claim as many exemptions as they legally can in order to receive the maximum paycheck. However, the drawback to this is that, in doing so, you could end up owing money when you file your tax return. On the other hand, if you don’t take enough exemptions, you could end up overpaying; sure, this does mean that you’ll receive a refund at the end of the year, but at what cost? That’s money you could have used throughout the year rather than essentially lending it, interest-free, to the government.
Ideally, then, you should fill out your W-4 so that you pay as close to the right amount of taxes through your employer’s withholding.
Calculating Your Withholding
It takes a bit of research and calculation to determine exactly how many exemptions you should take to break even come tax time. The best way to do this, however, is to estimate your earnings and tax responsibilities for the year using IRS Form 1040-ES. This form allows you to calculate your estimated annual income and contains information on current tax brackets and rates to help you determine what your tax responsibility will be at the end of the year based on your exemptions. If you work a job where you’re paid an annual salary, you should be able to calculate this quite accurately. If you’re paid hourly and your hours fluctuate each week, do your best to estimate.
From there, you can determine whether you’re better off taxing zero exemptions, one, two, or more. Come tax time, you can enjoy the peace of mind in knowing that you should at least come close to breaking even. For more information, or if you would like professional assistance, contact Tri-Check Income Tax Service or a similar company.Read More