Paying the Piper, or Five Simple Steps to Filling Out Your W-4

Changing Your Payroll Withholding

Right about now, if you haven’t already done it, you should be thinking about updating your current year’s paycheck withholding.

Once upon a time, a tax professional was asked by an Enrolled Agent to write an article about how to do the proper computations to determine what exemption and dependent amounts should go on an employee’s W-4.

After writing over 25 pages on the subject, his wonderful, clever assistant was able to cut it down to a mere 10 pages. Who can follow that, much less read it?! But, his analysis is a good indication of how complicated it can seem if you try to follow the IRS’s instructions for completing the W-4 Form.

TaxMama’s way is much easier.

You have to determine your tax payment strategy. There are basically only two concerns:

Strategy 1. Pay in enough to avoid the underpayment penalty,
Strategy 2. Pay in enough so you don’t owe anything next April.

Under the first strategy, while you won’t be facing any IRS penalties, if your income increases substantially this year, you will be faced with a very high balance due.

So, strategy 1 will include your being responsible enough to put the rest of the taxes you expect to owe into some safe savings account or money market account. (This is not money you want to put at risk – unless you have really good nerves.) Frankly, strategy 1 is my preferred method.

Determine how much tax you must pay.

1. Under strategy 1, it’s simple – pay 110% of last year’s total tax liability. (This does not mean the amount you had to send in with the return. This is the amount on the long form 1040, line 56, that says ‘Total Tax.’)

[Note: OK, sure, if last year’s income is under $150,000 ($750,00 single), you may pay in only 100% of last year’s tax. Let’s just look at that extra 10% as your cushion, in case anything goes wrong.]

2. Under strategy 2, you’ll need to do a projection of what you expect to earn from all sources – wages, business, stocks, savings, unemployment, investments, taxable winnings, whatever–so get out your crystal ball.

Figure out how many payments you’ll be making under the new W4 � in other words, how many payroll periods do you have left AFTER

you have notified your payroll department about your decision. (e.g. You are being paid every other week. That means there are 26 payroll periods in the year. How many are still left today?)

Start the computation: The method is the same for both strategies now � and it works for your state taxes as well.

Start with the total tax you want to pay.Let’s say it’s: $10,000

Deduct your withholding up to your
last paycheck (or the last one before
your new W-4 takes effect)
Then, get your balance:
$ 8,650  
Now, divide that by the number of pay
periods left this year – let’s say there
are 19 left (and round up)
$ 456  

That means you want $456.00 worth of Federal taxes deducted from each of your paychecks for the rest of the year.

Call your payroll department and ask what number of dependents will give you this level of withholding at your income level. Or get bold and look it up yourself. Use the SINGLE table for your income level  (make sure that you use the bi-weekly tables – or whichever one matches your payroll schedule):

IRS Payroll Tax Tables

Click Here for Withholding tables

For example, you earn $2100 per month – using S-0 (single, with no dependents) will have the IRS take out $431 from each paycheck. So, you will fill out ONLY the bottom of the W-4 with:

  • Your name, etc. 
  • Then, Box 3 = Single 
  • Box 5 = 0 dependents 
  • Box 6 $25.00 additional withholding ($431 +$25 = $456)
By the way, don’t worry if you’re not single. You’re just trying to get the numbers to come out right.

Oh yes, there is a way to avoid the tables altogether:

Put 20 dependents in Box 5, and $456 in Box 6. (That will get you -0- withholding from the tables but will force the payroll computer to deduct the full $456.00)

The main reason I don’t recommend that you do this?

Anything over 9 dependents, your payroll office must send your W-4 to the IRS. And once you explain your logic to them, they’ll do it. But until they do, oh the pain! 

Now, remember to do the same thing with your state withholding. You can find your state’s forms using this link.

So, you see, you don’t need lots of complicated computations. Even you can fill out a simple, 7-line form all by yourself. And this is no fairy tale.


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