The only thing that is as certain as paying taxes is how complex they are. There’s no way around it: taxes are confusing. That’s the way they’ve been for centuries (when collectors took wheat or rice instead of coins or paper money)! So, you might be wondering, what the heck is a withholding tax? How can they impact my interactions with the IRS? Well, sit back and read up because we have some simplified answers ready and waiting for you!
First Off, What is It?
You might have noticed this term when you’ve reviewed your paycheck. It’s a normal component of how income taxes are calculated: the sliced-off portion of the money that your employer doesn’t actually give you – they send it to the Internal Revenue Service, so you are not obligated to do so. The major reason why they are so important is that you need to be sure that the withholding is correct and isn’t unfair to you. A surplus of money benefits you because you’ll get a bigger tax refund. On the other hand, a shortage means you’ll owe the IRS money instead.
Who is Responsible for Paying Them?
As you might have guessed, your boss is supposed to pay the withholding tax for you. The process becomes a bit fuzzier if you work as a freelancer or independent contractor, for instance. It’s possible to be exempt from it, too. The catch is that you can’t owe any federal income tax for the previous tax year and that you don’t owe anything for this coming tax year, either.
The Basics of This Taxation Concept
It’s easy to break down the withholding tax into smaller parts. The first piece of the puzzle is the W-4 form you submit to your employer once you are on the job. This document includes information about your income, your filing status, and if you have elected to allow your employer to withhold additional money. Federal, state, local, and FICA taxes “payroll taxes” are the other fundamental elements you should recognize. That’s because they pay towards Social Security and Medicare funding.
Crunching the Relevant Numbers
The IRS provides a Tax Withholding Estimator. This tool enables you to review your withholding status. Before you can get started, you’ll need pay stubs, additional income information, and the most recent income tax returns. If you’re married, it’s a good idea to gather the relevant documentation from your spouse.
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