Saturday, April 5, 2008

How Much in Taxes Should I Withhold from My Paycheck?

Being the person in my company's human resources department who does the employment paperwork with new hires, I've come to realize that most people have not the slightest idea of the number of withholding allowances they should (or want) to put on their W-4. I'm not a financial advisor or a CPA, so I can't help them. They struggle through the crazy little worksheet that is supposed to help them figure out the number of allowances they should choose. And then they look at me and say, "Does that sound right?" I have no idea. I can't help them.

What I do assure them is that they will pay the same amount of income taxes no matter what they fill out on their W-4. The question is: will they pay the taxes during each pay period or on April 15? Will they get a big refund, owe more in taxes, or break even? There are so many factors that go into income taxes that there is no simple answer, which is why I do not have one for them.

The good news is that you can change your withholding allowances by filling out a new W-4 at anytime. Of course, that doesn't help what happened during past pay periods, but it does affect the future.

Personally, I prefer to have my withholding to be as close to the amount I will owe in taxes as possible. I don't want to owe more in taxes come April, but I also know that getting a big refund isn't advantageous either. (If you want to know more about that, read Savvy Strategies for Tax Refunds from the USA Today.)

Right now, I'm in a good place with my taxes. But come August, I'll get married, and my tax situation may be changing. I'll also have to consider what is going on with Michael's income and taxes. But rather than take a wild guess or try to figure out what to do based on that rather confusing W-4 worksheet, I'm going to use a tool on the IRS website: IRS Withholding Calculator.

If you have recently had or are going to have a change in status (i.e. marriage, divorce, birth or adoption of a child, home purchase) or if you just don't like your current way of paying taxes, check out this calculator. If you figure out that you need to make a change, go to your HR department and ask to fill out a new W-4.

Have you gotten or will you be getting a big refund this year? Washington Post columnist Michelle Singletary will tell you how to Use Your Foolish Refund Wisely.

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Kate said...

That's very interesting. The IRS calculator is very helpful. It looks like you can recalculate during the year as necessary. We got a (moderate) refund this year for the first time in ages. That was mainly because my husband got a huge raise the year before and we didn't adjust our withholdings enough so that we owed a huge chunk of change last April. Plus, I suck at math.

I would rather get a refund than have to pay, but ideally, I would be about even.

Terra said...

I'm not sure if you can help, but if so, please tell me what you think. I started a new job this year and make quite a bit more than last year. I am single and I have one child. I am currently having 5 Federal and State allowances being withheld from my check. Am I withholding too much?

Betsy said...

Terra - I'm not a tax expert, so I can't really help you with your situation. But take a look at that link to the IRS calculator. I think it's easier (and more in depth) than the worksheet that comes with the W-4. This is my first year having used it, so I won't really know how it turns out until next year when I do my taxes. But I feel pretty confident about it.