Tax withholding is something that most people have to do, regardless of occupation or financial situation. Every employer is required by law to withhold a portion of each employee’s earnings from their salary and wages in an effort to collect taxes up front. This practice is designed to help individuals plan for their tax responsibility, save money to pay taxes at the end of the year, and remain current with payments to the IRS.
Tax withholding is calculated based on factors that include an individual’s filing status and the number of withholding allowances he or she claims. After a wages or salary is earned, employers are required to use IRS-recommended tax tables to determine how much should be withheld from each paycheck.
Employees can increase or decrease the amount of taxes withheld based on the Estimated Tax worksheet and their desired tax payment options. The Estimated Tax sheet helps individuals to estimate how much they might owe in taxes at the end of the year. Some people find it helpful to calculate estimated quarterly taxes throughout the year.
When filing out the Estimated Tax worksheet, employees must provide information such as their gross income, estimated deductions, and credits to be claimed. The amount that should be deducted from each paycheck is determined by the differences between them. This is often referred to as “tax withholding,” and is intended to reflect a taxpayer’s final tax liability.
Federal law obligates employers to document their tax withholding procedures. Each employee should receive and review a statement of their withholdings, often called a W-4. This form is used to report payment information and to ensure that the correct taxes are being withheld on a regular basis. Employers are required to issue additional forms to employees that may include a W-2 to report income and withholdings, a 1099 to report non-employee income, and/or a 1040 or other forms as needed.
Tax withholding is important because it establishes a history of payment that’s easily verifiable and can save taxpayers a significant amount of money. The money withheld during each pay period is credited toward the amount of taxes due, reducing the burden at the end of the year. Without withholding, many individuals would find themselves scrambling to cobble together enough money to pay their taxes when the time for filing returns arrives.
Although tax withholding is a long-standing part of the wage and salary system, individuals are still encouraged to educate themselves about their tax obligations prior to filing returns. Withholding helps people keep up with their tax payments, but it doesn’t erase taxes that may be due at the end of the year. Preparing a detailed and accurate estimated tax worksheet can be a more reliable way to ensure all taxes are paid on time.
