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Tax Withholding


The federal income tax is a pay-as-you-go tax. There are two ways to pay as you go.

Withholding

  • If you are an employee, your employer probably withholds income tax from your pay.
  • Tax may also be withheld from certain other income — including pensions, bonuses, commissions, and gambling winnings.
  • In each case, the amount withheld is paid to the IRS in your name.

Estimated tax

  • If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax.
  • Usually, People who are in business for themselves generally will have to pay their tax this way.
  • You may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rent, and royalties.
  • Estimated tax is used to pay not only income tax, but self-employment tax and alternative minimum tax as well.

If you do not have enough taxes withheld, or you do not pay enough in estimated taxes, you may be subject to a penalty for underpaying your taxes.


Salaries and Wages

Income tax is withheld from the pay of most employees. Your pay includes your regular pay, bonuses, commissions, and vacation allowances. It also includes reimbursements and other expense allowances paid under a non-accountable plan.


Determining Amount of Tax Withheld Using Form W-4

The amount of income tax your employer withholds from your regular pay depends on two things.

  • The amount you earn.
  • The information you give your employer on Form W–4.
  • Form W–4 includes three types of information that your employer will use to figure your withholding.
    • Whether to withhold at the single rate or at the lower married rate.
    • How many withholding allowances you claim. (Each allowance reduces the amount withheld.)
    • Whether you want an additional amount withheld.

New Job

When you start a new job, you must fill out IRS Form W–4 and give it to your employer. Your employer should have blank copies of the form. If you need to change the information later, you must fill out a new form.

If you work only part of the year (for example, you start working after the beginning of the year), too much tax may be withheld. You may be able to avoid over-withholding if your employer agrees to use the part-year method.


Changing Your Withholding

If any event changes your withholding status or the number of allowances you are claiming, you must give your employer a new Form W–4 within 10 days after either of the following:

  • Divorce, if you have been claiming married status.
  • Any event that decreases the number of withholding allowances you can claim.
  • Generally, you can submit a new Form W–4 whenever you wish to change the number of your withholding allowances for any other reason.
  • If events in the prior year will decrease the number of your withholding allowances for this year, you must give your employer a new Form W–4 by December 1 of the prior year. If the event occurs in December of the prior year, submit a new Form W–4 within 10 days.

Forms

W–4

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