Three Common Questions about Withholding When Starting a Job
What is withholding? How do you know when to check/change withholding?
Withholding is the amount an employer takes out of an employee’s paycheck and remits to the IRS on their behalf. The amount withheld during the year determines if the employee owes taxes or is due a refund come April 15th.
Withholding depends on three things: filing status, number of withholding allowances claimed, and any additional withholding requested on form W4. Withholding should be checked periodically. It is also a good idea to review it when major life changes occur such as marriage or divorce, purchase of a home, birth/adoption of a child, or getting a second job. Many times, the amount of withholding needs to be changed when these events occur. Withholding may also need to be changed if you start earning considerable taxable income not subject to withholding i.e. interest, dividend, or self-employment income.
What is/how to fill out form W4?
Form W4 is used by an employer to determine how much money to withhold from your paycheck. The W4 is divided into five parts. The first section is basic info. The second section covers other sources of income such as a second job or a partner who also works. The third section is to indicate any dependents. Part four is optional and covers any adjustments such as additional deductions or supplemental withholding. In a two-income household, only one person should fill out steps three and four. Part five is for you to sign.
What if an insufficient amount is being withheld?
If the IRS determines that an insufficient amount is being withheld from your paycheck, they will issue a lock-in letter. This instructs the employer to disregard any W4 and start withholding at the highest rate of single with zero exemptions. Once this happens, there is a period before the rate is applied to submit a new W4 to the IRS along with a statement supporting the new withholding amount. These documents should be mailed directly to the address on the lock-in letter.
Withholding is one of the many things we look at when doing a comprehensive tax plan. To review your withholding and discuss other vital tax planning considerations please call an Innovative CPA Group tax planning professional at 203-489-0612 or contact us online.
By Rachel Schulze, Staff Accountant