Withholdings and Estimated Taxes
Peter VanderWoude, MS, CPA, CGMA
September 1, 2018
If you have concern after reading a recent article in the newspaper about the potential for some tax payment surprises at tax time due to a decrease in federal tax withholdings, you are not alone. Not only do we have federal tax law changes for 2018 to contend with and understand, we all need to see if the tax withholdings and estimated payments we have paid in during the year will have us smiling or frowning at tax time next April. The best scenario is when you neither smile nor frown because you expected the outcome.
Many people rely on the form W-4 and the status and exemptions they claim on it to have enough taxes withheld from their paychecks. It works well in most cases, but it is not until you file your return that you know for sure.
Circumstances like having multiple jobs during the year, fluctuating business and rental income, capital gain, early distributions from retirement accounts and a spouse who does not withhold enough can throw it off. There are a few cases where even claiming “single, zero” on the W-4, and the New York State form IT-2104, will not withhold enough.
What should one do? In situations where you have the same job and income as last year and your expenses are similar, you are probably fine if you had a tax refund for 2017. However, if you owed taxes with your tax return and did not increase tax withholdings this year by claiming less exemptions or having an additional dollar amount withheld, then you should revisit your withholdings with your employer. What if you changed jobs or have more than one job? Check your latest paystub to project taxable wages and tax withheld for 2018 and compare it to your 2017 tax return. Always contact your tax advisor if you need help making sure that you have paid enough in to yield the tax refund or payment due that you expect.
For folks that own their own business and pay estimated taxes, if income is similar to last year and they pay the amount of their 2017 tax liability in as estimated income tax for 2018, they should be covered. If there is a significant change to one’s business income, then those folks should contact their tax professional to recalculate their estimated tax payments and adjust what they pay for the third and fourth quarter. The due date for mailing in the third quarter estimated tax payment to the IRS and New York State is September 15.
If you determine that you have not paid enough income tax in to the government, then adjust your income tax withholdings from your wages or mail in estimated taxes. Just keep records of the amount of the estimated tax and date paid for your tax preparer. Hopefully, come next tax season your actions will leave you with a smile when you sign your tax return!