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Tax Planning Begins with Form W4

Author: Keith Huggett

When you are filling out your form W4 - Employee's Withholding Allowance Certificate, tax planning may or may note be the first thought in your mind. Usually it's about whether or not you'll be receiving a refund in April. While getting that refund is always nice, your goal should be to break even.

When you being employment you will be setting up your inital withholdings on your Form W4. It is important to review your W4 annually as your situation can change from year to year.  There are many different circumstances that can cause you to change your withholdings:

• Getting married or divorced
• Having children
• Buying or selling a home
• Changes in your contributions to your retirement or education savings accounts
• Changes in your employment

Figuring our just how much to withhold can sometimes be as complicated as preparing a tax return.  Your tax preparer may offer a service called a "W4 review", where he or she will go over your W4 with you, suggesting where you might make changes.  This can result in adjustments to your withholdings or estimated tax payments, depending upon your situation.  A W4 review is just the first step on the road to planning for your future.

From there, your tax preparer can plan ahead for the next tax year by creating a projected tax return. After figuring out your projected tax liability, simply use the withholding calculator provided by the IRS or your tax preparer's suggestions for your withholdings.  Your W4 form can be changed as needed.

Should you have any questions on W-4s, withholding,  or any other tax topic, our specialists at the Tax Office, Inc. are here to provide you with the answers. You can contact us, or ask us a question on our Facebook page.

4 Things You Should Know

Author: Keith Huggett

You know that when you have a new hire that you need to have that person fill out a Form W-4 for tax purposes.  This form tells you the person's marital status, number of withholding allowances, and any additional amount to use when you deduct federal income tax from the employee's pay.

As an employee, Form W-4 includes worksheets to help you figure out the correct number of allowances or there is a withholding calculator available on the IRS website for help in completing the form correctly.

• Exemption - Some employees may qualify for exemption from withholding. Form W-4 is also used for this purpose. To qualify for exemtion an employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year. If the employee can be claimed as a dependent on a parent's or another person's tax return, additional limitations may apply. This exemption is valid only for one calendar year. New W-4s need to be submitted each year, before February 15th.
• Invalid W-4 - If an unauthorized change is made to a W-4, it invalidated the form. Any mark made on the form other than the entries requested will invalidate the W-4. If there should be any mark on the W-4 other than the requested entries, ask your employee for another one. If the employee does not give you a valid one, withold taxes as if the employee is single and claiming no withholding allowances. However, if you have an earlier Form W-4 from this employee that is valid, withhold as you did before.
• Keeping Records - You must keep copies of W-4s for at least 4 years. A W-4 serves as verification that you are withholding federal income tax according to the employee's instructions and you have copies available should the IRS need to see it.
• IRS Notices - Should there be a compliance issue, the IRS will send out a notice. Both the employee and the employer will receive a notification that there is a problem. As the employer, you will be required to withhold additional income tax until the employee can explain to the IRS why additional tax should not be withheld. These notices are often referred to as "Lock-in Letters." After the lock-in letter takes effect, any request by the employee to change his withholdings that results in less income withheld than the lock-in letter, the employee must be referred back to the IRS.

W-4s can be changed as needed, as evidenced by the lock-in letters.  They may also be changed in the case of marriage, the birth of children, or in case the employee wishes to have additional withholdings deducted from his pay.  If you received a revised Form W-4 from an employee, you must put it into effect no later than the start of the first payroll period ending on or after the 30th day from the date you received it.

Should you have any questions on W-4s, withholding, new-hire's or any other tax topic our specialists at the Tax Office, Inc. are here to provide you with the answers. You can contact us, or ask us a question on our Facebook page.