Employers should
go to www.irs.gov and review Publication
15: Circular E, Employer's Tax Guide, Publication 15-A: Employer's Supplemental
Tax Guide;and Publication 15-B: Employer's Tax Guide to Fringe Benefits.
Why
Withholding?
In the "old days" there was no withholding. When the
government created income tax, you completed a tax return and sent a check. Guess
what — not very many people had the money to send.
Therefore,
withholding was created as a "convenience" to the taxpayer and a huge responsibility
for the employer. When the taxpayer did not respond appropriately (jump for joy
at the government's "help") the government created penalties for underpayment
of tax by appropriate time periods, i.e., if you do not have a percentage of your
tax paid by December 31 either through withholding or estimated payments, you
will pay a price for holding onto your tax dollars.
What
Determines the Amount to be Withheld?
At your place of employment,
your employer will require you to complete a "W-4 — Employee's Withholding
Allowance Certificate" and G-4 for Georgia (all states with income tax have a
similar form).
The form
is designed for those people with only W-2 income, and standard deductions. Based
on the withholding tables, you record how many exemptions (people) are deductions
on your return (plus yourself) and whether you are single or married. Your employer
will then withhold the amount that corresponds to your wage level for the pay
period and your number of "allowances."
Depending
on your situation (interest and dividend income, mortgage interest, children providing
you with a tax credit, etc.) this may or may not be the appropriate amount to
meet your tax obligation, without penalty.
To
review what is necessary to withhold or pay through estimated taxes without incurring
a penalty, review the safe harbor rules in the tax article titled: Estimated Taxes.
You
can adjust the number of allowances at any time, and the number need not reflect
the number of exemptions on your return. It should reflect the amount of tax to
withhold to "break-even" at the end of the year.
For
instance, if this year will be similar to last year, you would take last year's
tax divided by the number of pay periods you will have. You would then adjust
your allowances up or down until the appropriate amount is being withheld. You
can review Publication 15: Employer's Tax Guide at www.irs.gov to see what a change in withholding exemptions will
do at your pay level.
The
W-4 allows you to claim an exemption level and ask for additional specific dollars
to be withheld. With some payroll departments, you can simply ask for a certain
dollar amount to be withheld without being confused by the exemption levels.
It
is harder to arrive at an appropriate allowance level if you are married and both
work. My recommendation is to leave one person's alone and adjust the other. If
you use a C.P.A. or tax preparer, they should be able to compute the appropriate
allowance level for your situation.
You
should keep in mind that if your total tax obligation for the year will be less
than $1,000 it is not necessary to withhold or make estimated payments. You may
pay your taxes by the following April 15th without penalty.
You
should also remember that the U.S. Treasury does not pay interest on the dollars
they hold for you and return in the form of an overpayment when you file your
tax return. Do NOT use over-withholding as a savings method. If your employer
does not have a direct deposit payroll system that allows you to automatically
put your savings dollars in a savings account, you can always make that deposit
each pay period and earn interest all year.
Other
Withholding
Financial
institutions are required to withhold federal tax on your interest, dividends,
etc. if you do not supply them with a W-9 — a signed form with your name
and social security number. This is referred to as backup withholding and is generally
withheld at 31% of the taxable payments.
Pension
administrators will provide Form W-4P, Withholding Certificate for Pension
or Annuity Payments. You can elect no withholding, provide allowances or specify
a fixed dollar amount to be withheld.
IRA
distribution forms will ask you to elect no withholding, a percentage of the
withdrawal or a fixed dollar amount.
If you would like further information regarding this topic or any other tax related issue, please contact The Henssler Financial Group Tax & Accounting Division at 770-428-4025.
