Withholding is the dirty little secret to making today’s tax system work. That’s because most of us don’t actually write the checks for the tax we pay. Withholding saves time, eliminates paperwork, collects taxes regularly and timely, and verifies that we report all of the wages paid to us. Here’s how it works:
- Start with your salary (or your combined salary if you and your spouse both work).
- Estimate your adjustments to income, itemized deductions, and personal exemptions.
- Divide that number by $4,000 to calculate the number of “exemption equivalents” you need to subtract from your salary to reach your taxable income.
You need to deposit enough by the end of the year or you’ll owe interest, calculated weekly, on what you should have paid:
- If your 2016 AGI was $150,000 or less, you’ll need to withhold 100% of your 2016 tax or 90% of your 2017 tax.
- If your 2016 AGI was more than $150,000, you’ll need to withhold 110% of your 2016 tax or 90% of your 2017 tax.
Estimated taxes are the alternative for those with no employer to withhold throughout the year. These require you to estimate your total bill, divide it by four, and send quarterly checks to the IRS. As with withholding, you owe specific percentages by specific dates or you’ll owe interest on what you should have paid. For 2017, those requirements are:
- 22½% by April 15,
- 45% by June 15,
- 67½% by September 15, and
- 90% by January 18, 2018.
Review your withholding and estimates any time your tax picture changes. Employers have to make new W-4s effective by the start of the first payroll period ending on or after the 30th day after you submit your form. Do this as soon as possible if:
- You get married or divorced
- You have a baby (or adopt)
- You or your spouse takes a new job
- You or your spouse gets a raise
- You buy or sell a house
- You sell appreciated property