How Withholding Amounts Can Cause Tax Trouble and What You Can Do About It

Under the law, employers are required to withhold certain taxes from the paychecks of their employees. Unfortunately, employers do not always withhold the proper amount. When this happens, you may find yourself facing significant tax liabilities. To avoid falling into this trap, it is crucial to take the time to check your withholdings to ensure that enough money is being withheld from your checks throughout the year.

When Taxes Are Withheld From Income

We all know that the IRS imposes tax obligations with regard to the income that we earn. For most people, this means our wages. What many employees do not realize, however, is that income comes in many forms. The following are other common examples of income that may be subject to tax withholding requirements:

  1. Pensions
  2. Bonuses
  3. Commissions
  4. Gambling winnings

The best way to stay out of trouble come tax time is to have your withholdings match your actual tax liability. When an insufficient amount of tax is withheld throughout the year, you will end up owing money at tax time. Depending on the amount that you underpaid during the year, you may also face penalties and interest. Similarly, it is not a good idea for most people to over withhold during the year either. Overpayments are returned to tax payers at the end of the year. However, the taxpayer will not have access to that money beforehand.

Know the Right Time to Check Your Withholding

While your withholdings will be listed on each paycheck, it is not usually necessary to check your withholding amount every time you receive a check. Most taxpayers do not have rapid and frequent changes of their financial circumstances to warrant that kind of diligence. Instead, there are certain times when it is advisable to take a look at your withholdings. These times include the following:

  1. When you receive a big refund at the end of a tax period
  2. When you discover that you owe taxes at the end of a tax period and you were not anticipating owing anything
  3. When you get married
  4. When you get a divorce
  5. When you have a child
  6. When you purchase a home
  7. When there are changes in state or federal tax laws that impact your tax liabilities

Generally, any time something happens that could impact your overall tax liability for any given period is an important opportunity to review your withholdings and ensure that you are holding back sufficient amounts.

What to Do If Your Withholding Is Insufficient

If any of the circumstances above occurs during a tax year, the result could be that certain exemptions, adjustments, deductions, or credits may now apply to your tax situation. If you discover that your withholding amount no longer matches your tax liability, it is important to take action quickly. You may need to complete a new Form W-4, Employee’s Withholding Allowance Certificate. This Form allows you to change your withholding status or the number of your allowances. If something happens that will decrease the number of withholding allowances that you are able to claim, it is important to do this within ten days of the event occurring.

In addition to completing a new Form W-4 and giving it to your employer, you may also need to notify the Health Insurance Marketplace. This applies to taxpayers who bought insurance coverage through the Marketplace. This will help you to avoid receiving too much or too little of the premium tax credit, which would then affect the amount of your tax refund or tax liability at tax time.

Further, you may need to include Additional Medicare Tax and Net Investment Income Tax when calculating your withholding amount and estimating the amount of tax you will owe for the year. You can then request that your employer deduct and withhold additional income tax through your Form W-4.

Staying ahead of a tax problem is the best way to avoid finding yourself in trouble with the IRS. The good news, however, is that all hope is not lost if you are already facing a tax issue. We are here to help. Learn more about the experiences of our previous clients by checking out our client testimonials today.


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