The IRS has some advice for you: Review your withholding amount. Why? You just may avoid having too much or too little federal income tax taken from your paycheck. After all, if you have the correct amount withdrawn, you get closer to a zero balance at the end of the year when you file your return — in other words: no taxes owed and no refund due.
Let's take a look at the big picture. Changes happen in your life — marital status, for example —and that impacts exemptions, adjustments and/or credits that you can claim on your tax return. The cure? A new and revised Form W-4, Employee's Withholding Allowance Certificate, to change withholding status or the number of allowances. The sooner HR departments receive changes, the sooner they can adjust paychecks.
Of course, employees have to take responsibility for their own tax status, but your HR department may be proactive and remind you that they need a Form W-4 if you want to make changes. The end of the year is a good time to do this, but you are allowed to make changes anytime during the year, as your financial or family situation changes.
What about the self-employed?
Self-employed workers may want to take a look at the Form 1040-ES, a worksheet to correctly figure estimated tax payments.
Self-employed individuals generally must pay self-employment tax as well as income tax. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. In general, anytime the wording "self-employment tax" is used, the IRS advises, it only refers to Social Security and Medicare taxes and not any other tax, such as income tax.
In general, you have to file an income tax return if your net earnings from self-employment were $400 or more. (This number may vary from year to year, so check the current figures.) If your net earnings from self-employment were less than $400, you may still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions.
Why does this all matter?
These changes will affect whether there is an overpayment or underpayment of taxes. It behooves you to take a look and make any necessary alterations. For example, if you're having too little withheld, you'll get an unpleasant surprise when you file your returns, as you could have to write a big check. It's less of a problem if you're having too much withheld, but that means you're giving an interest-free loan to the federal government — no one wants to do that!
Our office will be happy to go over your withholding issues — not only as the year winds down, but anytime you have a financial or family change that may ultimately affect your tax liability.
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