Last year American taxpayers received a hefty $328 billion in income tax refunds with the average refund around $3,000. It's not difficult to see why the IRS loves for you to send them more money than you owe. And it's fun to get a refund. But in exchange for the average refund, you give up control of $250 a month for an entire year. That's $250 take-home.
You're in control
The IRS does not prescribe "hard and fast" withholding rules. Their guiding principle is "pay as you go". Self-employed individuals estimate and pay taxes quarterly. Employees file a Form W-4 on which they try to approximate a withhold number. But neither withholding nor quarterly estimate amounts are dictated as are the Social Security and Medicare taxes.
So you're in control. However, if you end the year owing the IRS money you could be assessed a penalty.
Whether you like getting a refund or, like most taxpayers, hate letting the government use your money for free, there is a way to come out even at the end of the year. Simply estimate what your tax will be for the entire year then withhold, or pay quarterly estimates, accordingly.
Of course, the ease with which you can manage your withholding or quarterly estimates depends on the complexity of your return. Taxpayers, whether employees or self-employed, have varying degrees of difficulty in determining their "pay-as-you-go" obligations. If you have a simple tax profile here are some steps you can take to determine how much to withhold or pay quarterly.
Employees
1. On January 1st determine your gross income and the number of pay dates for the year. Circle your paydays on a calendar and count the circles. For example, let's say you earn $50,000 per year gross and have 26 pay dates.
2. As a single taxpayer, your standard deduction is $5,800 for 2011; your personal exemption is $3,750.
3. Subtract your standard deduction and personal exemption from your gross earnings and get $40,450. This is your taxable income.
4. Look in the 2011 Tax Brackets (Google brings up many sources) and find the bracket for $40,450.
5. Determine your tax: 4,750 + (25% of 40,450-34,500) or 4,750 + 1,488 = 6,238.
6. Allocate $6,238 over 26 pay periods: 6,238/26 = 239.92 per pay period.
7. On your W-4 claim 99 exemptions and withhold an "additional amount" of $239.92.
Self-employed independent contractors
1. On January 1st estimate your earnings for the year. This is how much the company you work for will put on your 1099. Let's assume $50,000 and no deductible business expenses.
2. As a single taxpayer, your standard deduction is $5,800 for 2011; your personal exemption is $3,750.
3. Subtract your standard deduction and personal exemption from your gross earnings and get $40,450. This is your taxable income.
4. Look in the 2011 Tax Brackets (Google brings up many sources) and find the bracket for $40,450.
5. Determine your tax: 4,750 + (25% of 40,450-34,500) or 4,750 + 1,488 = 6,238.
6. Determine your Self-Employment tax (both the employee and employer portion of Social Security and Medicare taxes): 50,000 X.133 = 6,650. (There is a 2 percentage point reduction in this tax for 2011. Next year it will go back up to 15.3 %.)
7. Your total tax for estimated payment calculations is 6,238 + 6,650 = 12,888.
8. On April 15th use Form 1040-ES to pay $3,222 as a quarterly estimate.
9. Your second quarterly estimate is due June 15th. If your estimated gross pay has changed, recalculate your total tax obligation and adjust on your June 15th payment. Make any further adjustments for your September 15th and January 15, 2012 payments.
Critical distinction
If you're doing part time admin or bookkeeper work you may be an independent contractor rather than an employee. Make sure you understand which relationship you have with the company you are doing work for. An employee has taxes withheld throughout the year whereas the independent contractor does not. Plus an I/C pays both ends of the Social Security and Medicare taxes whereas an employee has his/her share withheld.
Start early and adjust
Your tax estimates won't always be as easy as described above. As you mature, your tax profile will become more complex. The important effort is to do a dry run of your tax return, including filing out the appropriate forms, early in the year. Then withhold or make quarterly payments based on your estimated total year end obligation. As the year progresses and change takes place as it usually does, adjust.
See how Excel can make estimating taxes easy. http://thebrainfriendlyshoebox.com
Article Source: http://EzineArticles.com/?expert=Richard_E_Collins
http://EzineArticles.com/?Withholding-Tax:-Increase-Your-Net-Pay-by-Managing-Your-W-4&id=6231583
| < Prev | Next > |
|---|
Facebook
Twitter
Myspace
Yahoo
Digg
del.icio.us
Windows Live
Blogger
Rain Concert
