Being on the employee side of the fence, I was assuming that the witholding system took out more than than was actually needed and then you would automatically get a refund. Last year [2001] I worked for about 7 different employers and ended up owing some money but I could understand that. [Federal tax was about 15%]
But this year [2002] I worked mainly for one employer and only 10% was taken out. Is something wrong here? How is with-holding supposed to really work?
~Peter
Replies
I'm not a tax guy but I couldnt help responding since you have the jayhawk on your message...
The little I know:
Depends on your income level, and depends on how many deductions you clame when you fill out your w-2
Withholding should be based upon what was put on your w-2. Underwitholding is something that the IRS doesn't like. Basically, you need to pay 90% of your taxes by Jan 15 of the following year, either as witholding, witholding plus estimated, or estimated. If by estimated, you need to also be within 10% for any one quarter, meaning you can't be light all year and then make up the balance on Jan 15th. They will tag you for the underpayment per quarter and hit you with penalty plus something like a 1% interest per month for the owed money. There is an out here, though, in that the 10% usually doesn't kick in if your tax payments prior to Jan 15th are greater than your tax liability for the previous year.
While most people are best served by using the calculated deductions, you can also underwithhold to compensate for end of year deuctions like mortgage interest and expected capital gains loss. Both Princess and I are taking 6 deductions at the moment, and we calculated that still leaves us with slight overpayment. I'd rather have the money right now rather than letting the Gov have it interest free for the year. But if you are going to do this, it requires a bit of preplanning and on the fly monitoring.
Major,
I'm with you, I'd rather have the money now and pay later, than the other way around.
I didn't know that there was much of a structure about all this, though. How do you know that the IRS will care about underwitholding (assuming they get what's due on 4/15)? Do you know from expience of yourself, others, or by reading the tax code? Does the IRS care if you're a relatively small fish?
It's been a while since I've filled out a W-4, are there instructions on there, along with statements like "swear that, to the best of your knowledge, the amount of deductions claimed above are accurate"?
Thanks for bringing up this point. I've always pondered in the back of my head, but never really researched it.
Jon Blakemore
I believe you can claim as many deductions on your W-4 as you want. You have to be accurate when you file your 1040, though.
I have myself, the wifey and two kids. My W-4 withholding was set at 12 for '03 and I still got a refund, so we upped it to 16 for this year.
I'll ask the missus tomorrow. She's the tax wiz in this house.
EDIT: Just asked the wife. sure enough, you can use whatever number you want for witholding purposes.
Edited 4/11/2003 10:37:40 AM ET by Mongo
The W-4 is not a "taxing" form. It is just a way of telling the employer how much to take out. But it is down directly by using exemptions.
Bascially you can put any number in there. A lot of people increase the number if they are get big refunds or decrease it if they have to pay.
A lot of factors outside the W-4 affect the amount of actual taxes that are owed.
The only thing is that if you put 99 the IRS will question it as that is commonly used by tax evaders.
>How do you know that the IRS will care about underwitholding
Because the time you make the estimated payments gets calculated into what you owe on the tax form. It's line 74 on this year's 1040. I've often underpaid, especially when it was impossible to know what kind of gains the mutual funds would post when. The penalties are small though. Publication 505 gives the details. Interesting note: It's even possible to make have an underpayment penalty even if you're overpaid for the year....it's all in the timing.
Ideally, you use a W4 like Mongo is, to adjust withholding so that you end the year with no liability or overpayment. And that's based on the deductions that you expect to have. But if you're self-employed with widely varying income, that's a lot trickier be/c you don't have W4's or withholding.
Edited 4/11/2003 11:41:06 AM ET by Cloud Hidden
Cloud,
I've never noticed that line, as I've always paid too much (the reason that I got involved in this discussion in the first place). I'm guessing that the penalty would negate any benefit from withholding less and dumping the difference in an interest bearing account, right?
Gotta love the IRS...
Jon Blakemore
Actually, the Princess and I did it empirically. We started at 3 deductions each and checked to see how our check was affected, then I did 4, checked again, she did 4, and at this point we figured that we were getting about 90% of the money back that we would get due to stuff like IRA, interest deduction, etc. But over the last 2 years we had some unanticipated stuff come along in the form of two parents passing away. In our case, each of these resulted in some more deductions which increased our refund, but you also need to be aware of other stuff that comes along and deal with it appropriately, such as estate income and capital gains. This year of course will be even more fun as I will be changing jobs, new kid in January, huge capital gains loss due to executor mismanagement, etc. When we were doing the W4 thing, I calculated our tax obligation for the year, and made sure we were slightly ahead of it on 4/15, 6/15, 9/15, and 1/15, the due dates for estimated tax payments.
Most of this stuff is sorted by computer, so they'll be able to flag underpayments throughout or at the end of the year. And if you have ever done estimated payments, like I did for a number of years (I still get the forms) then they will pay extra attention to you, ditto if you get flagged for an underpayment. The only good attention is no attention.
I certainly don't have all the answers to your question, except to say to keep an eye on your withholding every year.
I've gotten burned twice - Both times were when I had 2 jobs. The first time one of my employers wasn't holding out any income taxes at all, and I didn't notice until it was too late.
The second time I worked for a guy who had 2 companies. He paid 1/2 my salary out of each company. (Why, I don't know) Trouble was, he didn't adjust my income for the entire salary like he said he would, and my withholding was way, way too low.
Both times I got stuck paying a bunch of money at the end of the year. MY accountant said the IRS can fine you if you owe more than $500 at the end of the year, but they never did.
Right now I am having amnesia and deja vu at the same time. I think I've forgotten this before.
I'm not sure "burned" is the word, Ron.
I generally have 3-5 employees at a given time and my responsibility is to have them fill out a w-4. I generally don't give advice about there withholdings even if it is something I know about. It's not my place.
As an employee, it is your responsibility to make sure you get a w-4, and verify that your withholdings are correct.
I have someone else do my payroll, but I see what goes on the checks, so I think I know this much. It seems that if the witholding percentage varies according to the size of the check and the projected, year to date gross based on that. If your check is abnormally small less will be withheld. If your check is abnormally large if for example you have a lot of overtime, a greater percentage is withheld. If as the original poster suggested, you change jobs alot, each employer maybe basing your withholdings on what you earn from them.
As an employer I am in no way, shape or form responsible for how much my employees are under or over pay at the end of the year, to my knowlege. But I'm sure that day is coming.
Incidentally, I heard here in PA that the average refund as of a few days ago was around $2000. I am amazed that people get so excited that they let the government play with their money all year. Sometimes it makes sense for me to pay the penalty for the whole year. Last year it was 6-8% depending on when the payment was due. If one were to underpay by $10,000 for the entire year, the penalty would be maybe 700 bucks. I wonder how many people overpay their taxes, and carry consumer or credit card debt at a much higher percentage, ie virtually all credit cards. Pretty much everyone I can think of that got a return.
Tom
There are two ways to be safe from penelties.
1) pay 100% of the prior years tax obligation.
2) pay 90% of the current years tax obligations.
For a person with a salary there should be no problem. You can adjust your W-4 each January.
For a small business let your CPA assign safe quarerly payments for you. (My wife's (a CPA) software prints up the quarterly payment forms.)
Well, "burned" seemed to me to fit both situations. I ended up owing a lot of money at the end of the year, which I didn't have.
In the first one, I filled out the W4 correctly, but they did't take out ANY income tax. While I admit I should have caught it sooner, the employer still screwed up.
The second one was my bosses' fault, IMHO - He said he would take care of the tax problem, but didn't. My only fault there was taking him at his word and not double checking him.
As an employer, don't you expect your employees to watch out for your interests, even if they're not specifically in their job descriptions? I know I try to, and I expect the same from my employers.Have you ever seen a toad sitting on a toadstool?
I don't know Ron, I guess I'm jaded. I expect my employees to watch out for my best interests, and likewise I take my responsibility to watch out for their best interests very seriously. I also expect that human nature will prevail and we will both put the others best interests after our own. Self preservation ought to be instinct #1.
Collecting taxes for the government shouldn't be my responsibility at all. But a couple of generations ago there were some real suckers...Tom
Tommy,
I also cannot understand why people are excited to get money back. It's like they think the gov. is giving them money...
Kinda like tax breaks. People will routinely say "well, you can write that off", and I know what they are thinking is it doesn't cost a penny because we can write it off. They don't understand that you are only saving however much tax you would have paid otherwise.
Who knows, maybe they do know but just want to have something to get excited about in April.
Jon Blakemore
I think you got close to it. "..the witholding percentage varies according to the size of the check and the projected, year to date gross ..." One time we worked on the fourth of July or something and should have made a bundle but the paychecks barely reflected that.
I called the employer and she looked it up and said everything was in order. In fact I even had them take out an additional $10/paycheck to solve this problem -- not that that helped.
Income
Rate
$5000
10%
$10,000
12.0%
$15,000
13.0%
$20,000
13.5%
$25,000
13.8%
$30,000
14.8%
$35,000
16.5%
$40,000
17.9%
$45,000
18.9%
$50,000
19.7%
The problem seems to be that the progam -- I didn't ask which one -- withheld at the 10% rate when it should have been 15% or so. I like receiving refund checks.
~Peter
Note: those figures are after the exemptions and from the tables. I don't know the exact formula [if there is one].
Just an FYI to all, That table:
Income
Rate
$5000
10%
$10,000
12.0%
$15,000
13.0%
$20,000
13.5%
$25,000
13.8%
$30,000
14.8%
$35,000
16.5%
$40,000
17.9%
$45,000
18.9%
$50,000
19.7%
is reflecting average tax rates across one's income. Given that we have a progressive tax system, taxes are calculated more like this.
DISCLAIMER
The actual numbers vary depending on your situation ie. filing status and a bunch of other stuff. Also the #'s I'm throwing out in no way reflect reality, I'm just adding a little to this thread. I'm not a lot of things, one of them is an accountant (but I have taken ~half dozen or so accounting classes so I'm not completely ignorant)
First $1000. Gov. pays you money
Anything earned between $1K and $6K no tax
Anything earned between $6K and $24K you pay (not sure but I think) ~15%
$24K to ?$100K 27%
?$100K to $????K 39%
$????K to more $?????K ?%
hopefully you get the idea.
Also, used to be the marginal rate dropped at a certain (high) income level so that ones average tax rate would be flatter. I don't know if this is the case anymore.
Jon
Workshop Jon:
$6K and $24K you pay (not sure but I think) ~15%
$24K to ?$100K 27%
?$100K to $????K 39%
I don't know where you got those figures from. I just based my little table on the 540A tax tables. This is, of course, after deductions and exemptions. But $25,000 still results in just 13.8%. Maybe congress said 15% and the IRS bureaucracy manipulated it somehow.
Maybe my employer's with-holding tax program doesn't work right. Maybe Mr. Bush's tax reduction just reduced the with-holding and not the final bill. I don't know. It shouldn't be that hard to program that.
~Peter
What I was trying to get at was that when you get money deducted out of your paycheck, it is more of less calculated as if you make more or less the same every week. Hence they are average tax rates. Come April 15 you settle up based on total income for the year.
Taxes are a complicated subject, and I'm no expert, and there are books that are really thick that nobody has read about tax law.
Let's say that hypothetically you work for two weeks one year and earn $3000. per week. The government bases its withholding on the assumption the you will earn $3000. X 52 weeks ie. $156K and calculate and deduct a rate based on that (based on you filing status). Since in the end you only earned $6000 that year, because you took the rest of the year off and we have a progressive system, you get every dime back because the first rate doesn't tax any money earned below that level. Had you made $6001. you would have owed $0.15 since every dime eared between $6000. and $24K is taxed at 15%. Do you follow?
Jon
When I was a young field engineer with a desk in the job trailer, I often got called upon to help with new employee sign-ups. Filling out the W-4s and getting them signed. Instead of asking a new pipefitter whether he was married or not and how many dependents he wanted to claim, I got to asking whether they wanted to get a big refund, or no refund and owe a little. The tax code then, and maybe still now, made single people pay more, thus we withheld more, and if someone wanted a fat check back, I would advise SINGLE and ONE. "No, I can't do that, I'm married," came the usual reply. I would explain that the W-4 simply sets up the deduction schedule. If you want some back, then do your W-4s and claim as few dependents as you can.