You’ll be required to complete a W-4 form anytime you start a new job. It tells your employer the correct amount of federal income tax and state tax to withhold from each of your checks. It’s known as the Employee’s Withholding Certificate and a new form should be completed anytime your circumstances change. It determines your tax liability at the end of the year and if you’re entitled to a refund.
Many individuals claim a greater number of withholdings than they need in expectation of a large refund at the end of the year. However, the IRS advises minimizing withholdings to make tax liability and the amount of taxes withheld as equal as possible.
Too little withholding can result in a significant tax bill at the end of the year and penalties for underpayment. Conversely, withholding too much will give you less available income throughout the year, while essentially giving the government an interest free loan.
A larger withholding base on your W-4 can be helpful if you have a side hustle or are part of the gig economy. If you have income from either source, you’ll have to report it on your federal income tax and you’ll be taxed at a higher rate as being self-employed.
There are several situations in which you’ll want to change your W-4 withholdings. They include marriage, having a child or adopting one, getting divorced, or if a spouse gets a job or changes employment. You can also request in writing that your employer compute withholdings on the part-year method if you work no more than 245 days per year.
Your W-4 is a critical tool in determining how much money you take home with each paycheck and how much money you owe at tax time. The amount withheld will also have an impact on your standard of living throughout the year.
At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs. We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!