Two questions that I am asked frequently by my clients are: “How much should I be paying in taxes on each paycheck?” and “How many exemptions should I claim for the year?” My answer is usually suited to the particular client as each client have very unique situations. However, as a tax professional, you can't know everything. It’s impossible to even try to do so! The last time I was asked this question (started in person and ended via text) the conversation went a little something like this:
Question: “Hey I have a question. One of my co-workers says she changes her exempt status like once or twice a year to have extra money. But she changes her exemptions back right after. Do you recommend that?”
Answer: “It depends on the person, and how well they manage their money. It sounds like your co-worker has a handle on her finances. The common mistake most people make is forgetting to change the exemption back. And honestly, this should be done no more than twice a year after you have paid enough taxes to cover yourself. I personally think that if most my clients increased their exemptions by one, they would see extra money in every paycheck. But this idea is a hard-sell because it means they will have a small tax refund next year.”
Question: “How can I figure out how much I will have to pay in taxes?”
Answer: “Personally, I estimate my federal and state income taxes based on last year’s tax return and the current year’s tax brackets. Then I take that number and divide by the number of paychecks I expect during the year. I request that I pay a flat tax amount every pay period. By doing this, I see my “extra” money throughout the year instead of once a year.”
Question: “Ok. But see that’s you! How can I determine the number of exemptions I need to claim?”
Answer: “The easiest way to determine the the number of exemption to claim is by going to the IRS website and searching for the withholding calculator. When using this calculator you will need your most recent paycheck stub. It will only be effective as the information you put in the calculator. I use it myself periodically, and it has been on point for the last couple of years. Try it out, and let me know what you think”. (You can try it too! Click here).
Question: “Good morning…I just tried doing the calculator thingy you were talking about, which I hope I did it right but it said 3 allowances. I currently claim 1 if that info will help you.”
Answer: In this case you are allowed to claim up to 3 allowances without penalty, “I would claim two to be on the safe side. Tax laws change every year in November. It's a good rule and habit to check your withholding every June and December”
The key to income tax and withholding is making sure enough is being withheld from every pay check. I know people who are having too much withheld, while others are paying too little income tax. The tax system was designed to balance to 0. Or the worst case: you would have either a small refund or owe a small balance. It is the responsibility of every taxpayer to find that balance, not our employers or the IRS.
Are you claiming the right number of Exemptions- Adjust your tax exemptions
Use these nifty calculators to see if you are on the right track with your taxes. You will need your most recent paycheck stub and prior year’s tax return.
Federal Income Tax Calculator
State Income Tax Calculator
If you want to find out what your net pay will look like, take a look at the Paycheck Calculator. This app will guide you through a line-by-line process and give you an accurate expectation of what you will take home each pay check.
Jéneen R. Perkins is a freelance accountant and consultant serving entrepreneurs, families and small businesses. She prides herself in being a Freelance Accountant, Fluent in plain English”.
"Putting My Money Where My Mouth Is" is a journal about real life experiences and answers to tough tax questions posed to Jéneen R. Perkins, Owner of Eclat Enterprises, LLC