How to Figure Taxes on Your Pay Check

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By howsitdone
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When you finally land that new job or your household composition changes (new family members arrive or kids leave home), it's time to file a new W-4 Form at work. Another time to do this is when you've found yourself owing taxes rather than getting a refund when you file your tax return. This article will help you decide what to put on the Form W-4 and how it will affect your bottom line.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

Basic knowledge about your marital status and number of dependents

Step 1

The first concern for most people when filling out a new W-4 form is trying to make sure they fill out the top part correctly. Worry no more: the top part is simply a worksheet for your "convenience," to help you come up with the magic numbers for the bottom of the form. You don't even need to use the worksheet, and the IRS will never see it. It stays with your employee files or you can cut it off and throw it away.
Step 2

The real key to deciding how to claim your withholding is to figure out what your goal is. Do you want to cut it as close as possible to having a zero balance on your tax return, or do you want to know you'll have a big refund? If there is only one wage-earner (low to middle class income) in the household who has only a single paid position, the rest is easy. For two working spouses or one person with more than one job or a high paying job, it's a bit more complicated -- but not impossible.
Step 3

For households with just one average wage-earner, add up all the dependents in your household, including yourself and your spouse. If you want to just break even with the tax man when you file your tax return, you can fill out the W-4 Form showing your actual marital status (married or single) and the number of exemptions will be the total number of dependents in your household. To shoot for a refund, claim one less exemption than the number of dependents you actually will have. Your refund will be larger yet if you'll be able to use Itemized Deductions or have losses to show elsewhere on your tax return.
Step 4

Tax withholding tables are designed with a lone wage-earner in mind, so the additional income of a second or third job often requires a higher level of withholding than you might think. In my tax practice I generally advise married couples to have the spouse with the highest earnings claim "married, but withhold at the higher single rate" and that same spouse claims one less exemption than the family actually has. So if there are 3 children and 2 spouses, the higher earning spouse would claim 4 of those 5 exemptions on his/her W-4 Form. The spouse earning less would NOT claim that one remaining exemption, however. He or she would show a status of "married" but claim 0 exemptions. The same would apply if one spouse has two jobs and the other spouse has no taxable income. For a single person, he/she should claim a "single" status and one less exemption than actually exists, to assure a refund rather than a balance due on the next tax return. For a really fat refund, a single parent might want to claim no exemptions on the W-4 -- but be aware that the fewer exemptions you claim on the W-4 Form, the smaller your paychecks will be. Since many single parents are eligible for a large refund because they qualify for the Earned Income Credit (more about that in another article), dropping exemptions on the W-4 Form can be overkill.
Step 5

Another way to ensure you'll have a refund rather than a balance due on your tax return is to designate a set amount of additional withholding to be taken from each paycheck. There is a line on the W-4 Form for this purpose. So, if you find yourself owing, say $2400, to Uncle on this year's tax return, you can leave your marital status and exemptions as they currently are on your W-4 Form, and request that $100 extra per semi-monthly paycheck be withheld ($200 per monthly paycheck or $50 per weekly paycheck). Done early enough in the year, that should keep you from having a balance due the following year if everything else in your life remains roughly the same.
Step 6

To decrease the amount of withholding from your paychecks, just reverse the processes described above (claim an extra dependent, etc.). The best way to know how to adjust your withholding in either direction is to start by asking the payroll manager at each job to tell you what your current withholding status is. Work from that point, using the principles in this article, to increase or decrease withholding to meet your goals. It's your choice whether to leave your money in the government's bank account all year (earning no interest for you), or to bring as much as possible home in your paycheck (and risk owing Uncle, with possible penalties and interest due at tax time).