Find out if you should adjust withholding taxes now and why.
Introduction: What is Withholding Taxes?
Withholding taxes are a crucial aspect of the tax system in the United States. They refer to the amount of money withheld from an individual’s paycheck by their employer, which is then sent to the government as a tax payment.
The purpose of withholding taxes is to ensure that individuals pay their taxes on time. It’s best this way rather than waiting until the tax filing season to make a lump sum payment.
For example, we are already filing our 2022 tax returns during this 2023 tax season. But for all paycheck taxpayers, the government already got your taxes in 2022 because your employers withheld tax from every paycheck you got.
However, many taxpayers may not know how much they should withhold and whether they should adjust their withholding taxes. But this is crucial, given that we just started another tax year (2023). This means that for you to get everything right concerning taxes (to be filed next year), adjustments must be made now.
In this blog post, we will guide you through the process of determining your current tax situation, understanding why you may need to adjust your withholding taxes, and explaining how to make those adjustments.
Understanding Your Tax Situation
The first step in determining if you should adjust your withholding taxes is understanding your current tax situation. To do this, you’ll need to gather information about your personal income and deductions.
You’ll need to have access to your most recent pay stubs, as well as your tax return from the previous year. For example, get your 2021 tax return on hand and check your pay stubs from 2022.
With this information, you can calculate your current federal withholding taxes. To do this, you’ll need to use your pay stubs to determine your gross income (the amount you earn before taxes are taken out). Then, you’ll need to use your tax return to determine the amount of money you paid in taxes last year.
Once you have these two numbers, you can calculate your current withholding taxes by dividing the amount of money you paid in taxes by your gross income. This will give you a percentage that represents your withholding taxes.
Nevertheless, if this is too much for you, you can make use of our Estimated Tax Calculator Workbook, found HERE. It will help you determine how much you are likely to owe and use that to calculate your withholding. If you run a business or make extra income besides a salary, you will have to make estimated quarterly tax payments.
Reasons to Adjust Withholding Taxes
There are various reasons why you may need to adjust your withholding taxes. Some of the most common reasons include changes in filing status and personal circumstances. Examples include starting a new job, getting married, or having a child. These changes can affect your tax situation and, therefore, the amount of money that should be withheld from your paycheck.
In addition to changes in personal circumstances, new tax laws and changes in tax rates can also affect your withholding taxes. For example, if the tax rate for your income bracket increases, you may need to adjust your withholding taxes to ensure that you are paying the correct amount. You can view the 2023 tax brackets HERE.
How to Adjust Withholding Taxes
If you determine that you need to adjust your withholding taxes, the next step is to take action. The process for adjusting your withholding taxes is relatively simple. All you need to do is fill out a new W-4 form and submit it to your employer. This form will allow you to adjust the amount of money that is withheld from your paycheck.
It is important to note that not adjusting your federal withholding taxes can have consequences. If you do not adjust your withholding taxes and end up owing money to the IRS at the end of the year, you may be subject to penalties and interest charges.
On the other hand, if you adjust your withholding taxes and end up having too much money withheld from your paycheck, you may receive a large refund when you file your taxes. See below for reasons why a large refund because of withholding too much money from your paycheck is not good.
What Happens If You Do Not Adjust Your Withholding Taxes?
If you do not adjust your withholding taxes, you may end up owing money to the IRS at the end of the year. This can happen if you have too little money withheld from your paycheck, which means you are not paying enough taxes throughout the year.
When you file your taxes, you will be required to pay the remaining balance owed to the IRS. This should be done by the filing deadline, usually April 15 each year. However, for the 2023 tax season, the deadline to file and pay is April 18 because of the weekend and a public holiday.
If you cannot pay the balance in full, you may be subject to penalties and interest charges. These penalties and interest can add up quickly and can make your tax bill much larger than it would have been if you had adjusted your withholding taxes and paid the appropriate amount throughout the year.
Additionally, if you have not adjusted your withholding taxes and you are expecting a large refund, you may be in for a surprise. This is because you have effectively given the government an interest-free loan throughout the year by having too much money withheld from your paycheck. This means that you may have missed out on the opportunity to use that money to pay bills or save for your future throughout the year.
Overall, not adjusting your withholding taxes can have negative consequences, so it’s best to review your withholding taxes regularly and make adjustments as needed. It’s also important to stay informed about the tax laws and regulations and to consult with a tax professional if you have any doubts or questions about your tax situation.
If you need a tax professional to speak to, our doors are always open. You can call our office at (202)618-1297.
Conclusion
In conclusion, it is important to understand your current tax situation and know why you may need to adjust your withholding taxes. The process of adjusting your withholding taxes is relatively simple and can be done by filling out a new W-4 form and submitting it to your employer. Not adjusting your withholding taxes can have consequences, so it’s best to review your withholding taxes regularly and adjust as needed.
If you need to hire a tax professional to prepare and file your 2022 tax return, contact us now. Do so quickly before we are deep into this tax season so you have enough time to submit an accurate return. Call our office at (202) 618-1297 to hire us to prepare your tax return.
Frequently Asked Questions
- What is tax withholding?
Tax withholding is the process of deducting a portion of an employee’s income for taxes owed to the government. This income is deducted from each paycheck regardless of whether a taxpayer is paid weekly or monthly. The money withheld is a credit against a taxpayer or, in this case, an employee’s annual income tax bill.
- What are examples of withholding taxes?
Examples of withholding taxes include income tax and social security tax withheld from employee paychecks. There are also broad types or classifications of withholding taxes used in our tax system, namely the U.S. resident and nonresident withholding tax.
- Who pays withholding tax?
Employers are responsible for withholding taxes from their employee’s paychecks and remitting them to the government. However, when the withheld tax is less than expected from a taxpayer or employee, the employee will be responsible for paying the difference when they file tax returns. The remainder must be paid before the filing and payment deadline, usually on or around April 15 of each year after the conclusion of the tax year in question.
- Why do we pay withholding tax?
Withholding taxes are paid to the government as a way to pay taxes owed regularly rather than in one lump sum at tax time. This is to maintain a pay-as-you-earn or pay-as-you-go system that, in the end, helps the taxpayer.
- What are the three types of withholding taxes?
Three types of withholding taxes are income tax, social security tax, and Medicare tax.
- How is tax withholding calculated?
Tax withholding is calculated based on an employee’s income and tax filing status, using IRS guidelines and forms such as the W-4. Residents and nonresidents of the United States who earn money from American sources are subject to withholding tax.
