Most of us don’t want to pay taxes—the good news is that most of us don’t have to on Tax Day. Recent statistics show that only about 39% of Americans owed federal income taxes in 2020 during the height of the pandemic. That means the majority (61%) owed nothing.
How come? The answer is the W-4 and tax withholding. Most of us don’t pay taxes on Tax Day because we’ve already paid them throughout the year via tax withholding.
So, how much money is withheld from your paycheck? The answer depends on your specific tax situation, but we hope to clear up some confusion by outlining the basics. Learn more about tax withholding and how it applies to you below.
How Does Tax Withholding Work?
Before you get into the details, it’s crucial to understand how withholding works.
As an employee, you are paid by your employer. Your employer doesn’t just hand over all your earnings, though. A percentage of your income is withheld and given to the IRS. Consider this an advanced payment on your income taxes—if your employer did not withhold this amount, then you’d be expected to pay it all in one big lump sum come tax time. For most Americans, it’s far easier to bear the brunt of their tax burdens by paying them with each paycheck rather than all at once.
If you’re self-employed, or your employer doesn’t withhold your taxes, then you’ll be expected to pay them on your own.
Who decides how much is withheld? That’s where the W-4 comes in.
How Does a W-4 Work?
Prior to 2020, you’d fill out a personal allowances worksheet on your W-4 to determine the amount your employer withheld from your paycheck. Now, however, you’ll find a five-step process on your W-4 form:
- Fill out your personal information
- Account for your and your spouse’s job, if filing jointly
- Claim your dependents
- Take the standard deduction or list your deductions manually
- Sign and date the form
The amount ultimately withheld from your paycheck is a factor of your combined income (if filing jointly), how many dependents you have, and your deductions.
If you underpay, you might end up owing the IRS when you’d typically get that money refunded. If you end up owing way more than you can pay off, then you’ll be researching tax relief solutions to help get you out of debt!
To avoid that situation, consider using a W-4 withholding calculator to determine how much you’ll owe if you opt not to have your taxes withheld by your employer. This type of calculator is available directly on the IRS website. You’ll want to input all your information to receive the best possible estimate.
How Many Allowances Should I Claim?
Since 2020, filing a W-4 has become much easier. You won’t have to decide how many allowances to claim because there aren’t allowances on the form anymore. Instead, if you want to impact your withholding, then you’ll need to fill out the multiple jobs or spouse works sections. You’ll also want to fill out Step 3, which goes over your dependents. If you have extra withholding you want or if you have other income, you’ll fill out Step 4.
Do You Have More Tax Questions?
Are you still unclear about your tax situation? If so, then it’s advised that you speak with a tax expert about your situation. Getting professional help with your taxes could be the difference between getting penalized by the IRS and getting a chunk of money back through a refund!
Leave your tax worries behind by getting expert guidance from a team with over 30 years of experience working with the IRS. Contact us now to learn more about how we can help you!