What are tax withholdings? How do they affect you? How can you change them to help out with your tax obligations? Below are answers to some of your big questions.
Salary, Wages, and W-4s
Have you noticed that your net pay on your paychecks is smaller than your gross pay? Why is it that? As you’ve probably seen, some of that money is allocated for various things such as Social Security, Medicare, retirement, health insurance, and , of course, taxes.
How does your employer know how much to take out?
Based on your answers on the W-4 you filed out when you were first hired, the Human Resources department automatically deducts a certain portion of your pay to cover your tax obligations for the year. In the United States the tax system is pay as you go, so as the year progresses and you earn income, you employer has a portion of your paycheck allocated for taxes.
If you’re self-employed you have to withhold your own taxes and pay your estimated taxes throughout the year yourself.
Reasons You’d Want to Change Your Withholdings
There are several good reasons why you would want to go ahead and change your tax withholding for 2011.
- You want to reduce the big tax refund you received. Some people prefer to get their money throughout the year so they can spend, save, or invest it the way they want to.
- You have a change in filing status. If you got married or divorced, your filing status affects your taxes and you may want to update your W-4.
- You have a child. When you change the number of dependents you have, your tax obligations can change. Make sure you have the proper amount withheld.
If you have any questions as to whether or not you should change your W-4, have a brief appointment with your company’s Human Resource department to get more information. They’ll be happy to help you out.
How to Change Your Withholding
Why is it important to have the correct tax withholdings? You’re expected to pay 90% of your tax obligation as you earn it throughout the year. If you’re not sure what you’re withholding should be, the IRS has an online calculator to help you figure out how to properly fill your W-4.
Changing your W-4 is as simple as going to your HR department and requesting a new form. Follow the guidelines (and use the online calculator if needed) and fill out the form accordingly. When completed, submit it to Human Resources so they can have the your paychecks reflect the new amount.
Thoughts on Tax Withholdings
How many of you have adjusted your tax withholdings? Are you planning on doing so this year? Why or why not?