Evaluating your tax withholdings every year is an important part of financial planning. Knowing that you are withholding the correct amount so that you don’t get burdened with a huge tax bill is worth the time it takes. Most businesses have resources for employees to log in and view their W4 and make changes as necessary. If you feel like you're not withholding enough, you can also speak to your HR representative.
You’ll have to do some math, but it’s fairly straightforward to determine what your withholdings should be.
First things first, what is a W-4? A W-4 is a form that you fill out when you start working at a business and can make changes (as many as you want). This form tells your employer how much tax needs to be withheld from each of your paychecks. Some withhold too much, resulting in a tax refund after filing taxes with a W-2 form, others withhold too little, causing a tax bill. The key to W-4 withholdings is to find the right balance—not owing the government, but not giving them an interest-free loan, either.
A new W-4 was introduced in 2020. While it still asks for basica personal information, it took out the ability to ask for a number of allowances. This has placed the burden on the taxpayer to determine the correct deductions by using a deductions worksheet. This overhaul caused millions of Americans to owe money.
When filing taxes in 2021, many workers were shocked that they owed money instead of receiving a refund as normal. Due to changes in how W4s should be filled out for the 2020 tax year, some workers paid less in taxes than they should have, resulting in an unexpected tax bill to the IRS. Since Americans have already been affected financially by the COVID-19 pandemic, this was a major hardship for many.
As stated earlier, many employers offer resources for workers to log into their pay accounts and change their W-4s as needed. The IRS also offers the W-4 form for Americans to fill out. The major differences in the new form compared to previous ones are:
Reporting this income will change the amount of taxes withheld.
It’s true, taxes and tax forms are complicated. With so many moving parts, like itemized items, deductions, and now math thrown into the mix, some prefer to just go to a financial advisor or accountant. Generally, these services are offered at a low price. It gives many the peace of mind to know that their forms are correct than to be surprised with a large tax bill come tax season. If you’d like help to fill out your W-4, contact a financial advisor today.
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