Two of the most frequently questions I am asked by my clients are: “How much should I be paying in taxes for each paycheck?” and “How many exemptions should I claim for the year?” My answer is usually suited to the particular client. Each of my clients has unique situations that I am aware of. However, as a tax professional, you cannot 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 bit something like this:
“Hey I have a question. One of my co-workers says she files exempt like once or twice a year to have extra money. But she changes her exemptions back right after. Do you recommend that?”
“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 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.”
“How can I figure out how much I will have to pay in taxes?”
“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.”
“Ok. But see that’s you! How can I determine the number of exemptions I need to claim?”
“The easiest way to going to the IRS website and searching for the withholding calculator. To use the calculator you will need your most recent paycheck stub. It will only 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).
“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.”
“I would claim two to be on the safe side. Tax law changes every year in November. So that’s why I check my withholding every June and December”
“That’s what I was thinkingJ. Cool thanks for the info. I’m gonna do that”
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 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. Take charge and start making sense of your own dollars and cents.
Do you have a question about withholding, exemptions, or taxes? Ask me on my blog or here.
"Putting My Money Where My Mouth Is" is a journal about real life experiences and concerns of Jéneen R. Perkins. The purpose of the blog is to exhibit the real life challenges and answer the tough questions posed by the concepts of business, entrepreneurship and money.