How Do You Know How Much Tax To Withhold

Though many people enjoy getting a refund check from the Internal Revenue Service (IRS) each year, ideally you should withhold exactly the right amount of money during the year to meet your tax obligation.

But how do you arrive at that amount? The IRS says in most situations, the tax withheld from your pay will be close to the tax you figure on your return if you follow these two rules:

• You accurately complete all the Form W-4 worksheets that apply to you.
• You give your employer a new Form W-4 when changes occur.

But because the worksheets and withholding methods do not account for all possible situations, you may not be getting the right amount withheld. This is most likely to happen in the following situations:

• You are married and both you and your spouse work.
• You have more than one job at a time.
• You have nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income.
• You will owe additional amounts with your return, such as self-employment tax.
• Your withholding is based on obsolete Form W-4 information for a substantial part of the year.
• Your earnings are more than $130,000 if you are single or $180,000 if you are married.
• You work only part of the year.
• You change the number of your withholding allowances during the year.

Outside income

Taxpayers who have a job but operate a part-time business as well should make quarterly estimated payments to the IRS to cover the tax on your business income. These estimated payments must not only include the anticipated income tax, but also Social Security and Medicare payments, known as the Self-Employment Tax.

To make sure you are getting the right amount of tax withheld, get IRS Publication 919. It will help you compare the total tax to be withheld during the year with the tax you can expect to figure on your return. It also will help you determine how much, if any, additional withholding is needed each payday to avoid owing tax when you file your return.

To further take some of the guesswork out of withholding, the IRS provides a withholding calculator on its website. It can help you determine the correct amount to be withheld any time during the year.