Now is the time of year that many individuals, upon finalizing their annual income tax return, are looking to better understand one of two items: 1) why they’re not getting the refund they had hoped for; or 2) why they owe a ton in taxes. Most often the answer can be found by evaluating your IRS Form W-4 (Employee’s Withholding Allowance Certificate). We typically advise paying as minimum taxes as possible to avoid penalties, however, there remains a group of taxpayers who are looking for that vacation (re)fund or DIY project (re)fund. As a result, this time of year is full of Form W-4 adjustments. Here is what you need to know, along with a 5-step process to complete your Form W-4 as accurately as possible:
- Step 1: Update your personal information. Personal information should accurately represent your full name (including middle initial), current address, social security number and tax-filing status.
- Step 2: Account for multiple jobs. If you have more than one job, or you file a joint return, you may want to consider editing your W-4. Page 3 of the W-4 allows you to include additional income, disclose similar spousal income, or use the multiple jobs worksheet. When completing this step, the IRS’s Tax Withholding Estimator Tool is available for your use and can be found here.
- Step 3: Claiming Dependents. If your income is under $200,000 (single) or $400,000 (joint), you should enter the total number of qualifying children or dependents you claim on your income tax return and multiply them by the applicable credit amount.
- Step 4: Other Adjustments. Do you work an extra job or simply want extra withholding? This is the section of the W-4, where you can adjust your W-4 to include extra income tax withholding to assist with covering or reducing your April tax liability.
- Step 5: Sign & Date. Once the form has been updated, provide a signed and dated copy to your employer so they can adjust your withholdings immediately.
It is noteworthy to highlight that the IRS only requires that employees complete Steps 1 and 5, reserving steps 2-4 only if applicable for the employee.
While the calculation and steps above will result in a withholding amount more closely aligned to your year-end tax liability, it will never be exact.
Employers, it is important to communicate to employees their ability to update Form W-4 at any time to ensure that their current withholding is appropriate.
McKonly & Asbury continues to keep employers up to date on relevant IRS topics. For additional helpful questions and answers regarding the 2022 Form W-4, visit: 2022 Form W-4 (irs.gov).
If you would like to talk to one of our professionals in our Entrepreneurial Support & Client Accounting Segment on this topic or any other business related topic, please do not hesitate to contact us.