Employers withhold taxes from your paycheck based on information you provide on a W-4 form. Usually this results in a good approximation of how much you owe in taxes, but not always. If your personal situation changes, your W-4 information may be outdated. It's a good idea to make sure your job withholds enough taxes. Otherwise you may end up with a large tax bill when you file your tax return.
There are several reasons your job might not take out enough taxes. For instance, marriage, divorce or a grown child who can no longer be claimed as a dependant alters the amount of tax that should be withheld. When you have a second job or both spouses work, the same thing can happen. You may have other income as well. Self-employment or investment income can leave you with a large amount in tax liabilities.
To change the amount of money your employer withholds from your paycheck, you must complete and submit a new W-4 form. In cases such as a divorce, you are supposed to do this within 10 days of the event if the change decreases the number of withholding allowances you are entitled to claim. Form W-4 comes with worksheets to use in figuring out how many withholding allowances to claim. Alternatively, the IRS provides an online "Withholding Calculator" on its website.
What to Change
There are several ways to alter the amount taken of tax taken out of your check. One is to claim fewer withholding allowances than which you are entitled. This makes more of your earnings subject to taxes. You can also use the W-4 form to request that extra money be taken out of each paycheck. Be sure to claim the correct filing status. The withholding rates when you enter your status as married are lower than for single taxpayers. Another thing to watch out for is exempt status. Sometimes a person is eligible to claim exemption from payroll tax withholding and then later discovers she is earning enough to pay taxes.
When you have some income from investments or self employment, you normally have to pay estimated income taxes. However, it's acceptable for you to have extra money withheld from your paycheck to cover the tax liability. Occasionally, your job may take out too much tax instead of too little. You can remedy this problem by filing a new W-4 form with your employer, just as you do when not enough tax is taken out. Keep in mind that your employer cannot refund excess tax withheld unless it was due to their error. If the cause was the information on your W-4 form, you'll have to wait until you file your yearly tax return to get a refund.
The IRS can levy a penalty for excessive underpayment of taxes during the year. The penalty is in the form of interest calculated based on the amount of the underpayment. The interest rate is based on market rates and is adjusted each quarter. For example, the rate was 4 percent in the second quarter of 2011. The penalty is waived if the amount of the underpayment for the year is less than $1,000, if you paid at least 90 percent of taxes owed for the current year or 100 percent of your taxes during the prior year. In the event you become disabled, retire, or experience a disaster during the year that makes it unreasonable for you to have paid your taxes during the year, the penalty is waived. However, if your job doesn't take out enough taxes and you do nothing to remedy the problem, you run a risk of having to pay the penalty.