The United States federal tax system requires you to ‘pay as you go.’ This can either be accomplished by paying estimated taxes or withholding. The amount withheld depends on earnings, withholding status, and the number of allowances claimed. Read on to learn more about withholding—and what might happen if you don’t withhold enough.
Consequences For Insufficient Withholdings
As a United States taxpayer, failure to withhold taxes or make estimated payments could result in a significant penalty. You may be able to waive this penalty if a disaster or casualty event prevented you from withholding your income or making a required payment. Underpayment penalties can also be waived for anyone over age 62 who retires or becomes disabled—as long as the underpayment didn’t result from willful neglect.
How to Know If You’re Withholding Enough
It’s tricky to determine whether your withholdings will result in a refund, breaking even, or owing money to the IRS. The first step? Checking out last year’s tax return. If you anticipate similar income this year, you can bump up or reduce withholdings accordingly. If, however, you need to account for a considerable difference in income, you may require help from a tax professional.
Look to your latest payroll stub or tax statement to determine withholdings so far this year. Subtract withholdings from your projected taxes and divide by the number of remaining tax periods. If necessary, you can make changes with a new Form W-4.
Adjusting your withholdings now can save you from owing the IRS later. You’ll never regret getting a handle on your tax situation.
Not sure how much you should withhold for your taxes or how to proceed if you’ve underpaid? Highland Tax Resolution can help. Reach out today to learn more about our consulting and advisory services at 720-398-6088.