Does it really matter if you are withholding the correct amount from your paychecks for taxes? Doesn’t it all even out at tax time anyway? Well, yes—it probably will even out—but it’s still important to make sure you’re correctly withholding.
Why it matters
It’s important to ensure that your taxes are getting subtracted from your paychecks as accurately as possible throughout the year. If not enough is being taken from your checks, you could end up owing a lot of money come tax time. Who wants that?
On the other hand, if too much is being subtracted from each check, the government could end up owing you a lot of money. While this may sound nice, this is money that you earned and could be enjoying all year long. When too much is withheld, you’re really just offering the government an interest-free loan throughout the year.
Ideally, you should be having just the right amount of taxes withheld from your paycheck. However, it’s usually better to owe a little bit at tax time than to receive a refund. This allows you to enjoy all your money instead of waiting for the IRS to give it back to you. With this in mind, you’ll want to have a little money set aside in case you have a small payment in the spring.
While we most often recommend not giving the government an interest-free loan, there could be exceptions. If you know that you have a very difficult time saving, it may be more beneficial for you to make sure that your taxes are more than paid before filing. It would certainly be unfortunate to find out in April that you owe and don’t have the money saved up to pay.
How your withholdings are determined
Your withholdings are determined by how much you earn and how you fill out your W-4. The W-4 asks questions such as:
- Your filing status
- Income from other jobs/spouse’s income
- Number of dependents
- Tax deductions
- Whether you want an additional amount withheld
Answering these questions correctly will help ensure that your deducted amount is correct for each paycheck.
Your withholdings are determined by how much you earn and how you fill out your W-4. The W-4 asks questions such as:
- Your filing status
- Income from other jobs/spouse’s income
- Number of dependents
- Tax deductions
- Whether you want an additional amount withheld
Answering these questions correctly will help ensure that your deducted amount is correct for each paycheck.
How often does your W-4 need to be updated?
It is not necessary to update your W-4 every year. However, you do have to update your W-4 anytime you start a new job or have key financial or life changes. These include:
- Life changes such as marriage, divorce, the birth or adoption of a child, etc.
- When you or your spouse starts or stops a job
- If you purchase a new home
- When you have a significant non-wage income or self-employment income
Should you work with a CPA to ensure you’re filing your taxes correctly?
If you have a simple financial life, you may not need to work with a CPA to ensure that you’re withholding and filing your taxes correctly. There is plenty of helpful software out there to assist you with filing your taxes by yourself.
However, if you have a trust, a business, or something else that makes your financial life a bit more complicated, a tax professional can be a big help. He or she can give you peace of mind knowing that your taxes are filed correctly, and may even save you money as well.
As you near retirement, there’s a good chance that more tax questions will begin to pop up. These could include questions about Roth conversions, Medicare Part B premiums, etc. While you can find all the information online, it’s usually easier to use a professional and know that you have correct information and interpretation.
Withholding the correct amount from your paychecks is just one way to improve your financial future
We want our customers to be successful in every aspect of their financial future and financial planning. This is because we know that having a solid, well-thought-out plan in place brings order and peace to every area of your life and family. We care about you and want the best for you.
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This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situations above are made.
