Everyone in the United States looks on earnestly to April each year, as it is the time to file their tax returns. For example, citizens have to file tax returns for all income, purchases, and expenses from the previous year in 2024.
Taxes are an integral source of funding for government projects, entities, and services. Therefore, it is understandable that the IRS meticulously ensures that each resident of the country complies with the edicts that govern tax remittance.
The law requires everyone to pay taxes; however, how much you pay is entirely up to you. Exploiting this liberty can, however, pose dire financial consequences. What we mean here is how much or how little you withhold from your paychecks can affect your tax burden in the coming year.
For example, if you withhold a large amount from your paycheck, you would imply giving the IRS more than enough to clear your pending tax debt. In some extreme cases, the withheld amount may have an excess, which the IRS will not refund until next year, without interest.
However, if you withhold too little, your unpaid tax for the next tax year may be unapologetically large. If it is large enough, it may be accompanied by an underpayment penalty. You don’t want to experience this, as it may drastically reduce your paycheck’s expendable portion.
We are harping on this aspect of the tax returns process because it can affect your finances, particularly if you don’t plan accordingly. The US tax system is an unforgiving one, and ignorance of how it operates can drive the concerned party aground. For example, entrepreneurs and freelancers are required to make quarterly tax payments, unlike regular income earners.
Besides, the circumstances of the taxpayer may change with the turn of a new year. Likewise, the amount they withhold from their paycheck would also change commensurately. For example, they may experience a job change, change in marital status, or buy a house before their next tax filing.
So, it becomes imperative to regularly review the thresholds of their paycheck withholdings. The impending question now is: “How do I know how much to withhold for my tax?”
An easy way out is to check your pending tax charge for each year. If it consistently increases year upon year, even when you maintain a consistent financial lifestyle, then you’ve been withholding too little.
However, getting tax refunds each year is a sure indicator that you have been withholding more than enough. Just make sure it is not too much, as we are sure you have better cash flow potential for that excess.
Likewise, you can simply use the IRS Tax Withholding Estimator to strike the right balance. Once you have determined the appropriate amount, enter it into your W-4 or W-4P form.