Not enough withheld again.
February 15, 2010 3:41 PM   Subscribe

For at least 2 years I have had trouble with owing the IRS significant amounts of money at tax time. Please help me determine how to fill out my W-4s so this won't keep happening.

Both my wife and I work at respectable midsize companies and make above average income. We own our on home; kids are grownup. For the 2008 tax year, we owed an additional $1250 (beyond withholding) to the IRS. So we had additional amounts (box 6 on the W-4) withheld from each paycheck. For 2009 we owe about $2500! Even though I am good with numbers and doing my own taxes for years AND have what I think is a very simple tax situation, I am obviously not cluing into the W-4s correctly. We both list ourselves as married (box 3) with no allowances (box 5). Our total interest and dividends is about $1100.

Please help with friendly tax advice on this subject!
posted by Rad_Boy to Work & Money (16 answers total) 2 users marked this as a favorite
How has your amount withheld (on your W-2s) changed over the past year?

If the withholding changed as you expected (i.e., it increased by the amount of the additional withholding) and you still had a big increase in amount owed, your problem isn't with the W-4s; there must be something else going on.
posted by mr_roboto at 3:45 PM on February 15, 2010

Have you and your wife made significantly more money in the last two years? Withholdings in your case are based on prior year's gross income; if the income goes up alot in one year, the withholding will not reflect that until the following year.
posted by slow graffiti at 3:48 PM on February 15, 2010

I suggest taking the last two 1040s and comparing them line by line. Figure out exactly what changed, and you can do a better job of compensating for it.
posted by smackfu at 3:54 PM on February 15, 2010

It's not a bad thing to owe the IRS lots of money come tax time as long as you make that money work. Put the $2500 in a cd and get some interest from it.
posted by JJ86 at 3:55 PM on February 15, 2010

I did not know that withholding depended on prior years salaries. I figured it was just some percentage of last years income on a month by month basis. Yes, we have been making substantially more in the past two years. Even so, how do you effectively compensate for this. It's difficult to know how much additional money needs to be taken out.
posted by Rad_Boy at 4:03 PM on February 15, 2010

Use the withholding calculator on the IRS site.
posted by jgirl at 4:06 PM on February 15, 2010 [1 favorite]

If your tax picture in 2010 is similar to 2009, you can estimate your tax bill for the current year. Then look at the withholding on your current paychecks. Will this amount, annualized, cover your expected tax bill? If it is too low, go down to HR and amend your W-4 to include an additional withholding amount.
posted by Midnight Skulker at 4:10 PM on February 15, 2010

Does each of your employers have your status as married? If they have one of you as single, they won't be withholding enough. Since you say you make above average income, it's tough to tell how big of a portion of your total tax liability $2500 it, but that could be it.

You can also use a paycheck calculator to show what your paychecks should look like based on normal withholding. This has always been perfectly correct (to the penny) for me and is useful for modeling how much additional or lesser withholding will result from changes in the exemptions you're taking.

I do not think that slow graffiti is correct that withholding is based on the prior year's gross income for normal W-2 employment. Rather, it is based on the employee's salary, the employee's total expected tax liability (which might be off in your case, if they have one of you recorded as single, and gets fuzzy with two working spouses anyway) and the total number of exemptions on the employee's W-4. slow graffiti may be thinking of the "safe harbor" that protects you from underpayment penalties, as described in the fourth point here.
posted by iknowizbirfmark at 4:33 PM on February 15, 2010

Go to the source.,,id=96196,00.html
posted by mallow005 at 4:39 PM on February 15, 2010

Seconding that I'm 99% sure that what the IRs withholds is not based on the prior year, but on the IRS withholding tables.

While it's possible that your company isn't withholding the right amount, it may also be possible that you're missing out on something fairly big on your returns. Maybe check this years returns (I assume you're doing them by hand) against something like TurboTax where you don't pay until you file, it will tell you as you go roughly where you stand in terms of refund/owing more.
posted by Brian Puccio at 4:59 PM on February 15, 2010

Yeah, withholding is based on *that* paycheck, carried out to the whole year, at most places. Which is why everyone thinks that bonuses and overtime are taxed extra - they're not, much; but if you got that much every pay period, youd' be in a higher tax bracket.
posted by notsnot at 5:05 PM on February 15, 2010

Did you take the brand new $800 Making Work Pay tax credit?
posted by Midnight Skulker at 5:13 PM on February 15, 2010

iknowizbirfmark's linked to Paycheck city's paycheck calculator. That site also has an excellent w-4 assistant. You enter both you and your spouse's earning, how many weeks are left in the year, and your deductions and it will tell you what both W-4's should be.
posted by saffry at 5:51 PM on February 15, 2010

D'oh - I was thinking of the "safe harbor" rule, but I misunderstood how that relates to the standard per-paycheck withholding.
I understand how this could happen if they were freelancers, contractors, or otherwise got big chunks of extra cash not evenly distributed as salary throughout the year, or if their companies failed to adjust withholding after a raise, but now that I've been corrected, it does sound like a normal increase in salary with a proportional change in withholding should not cause the situation the poster describes.
posted by slow graffiti at 6:15 PM on February 15, 2010

Either your employer's payroll dept/service is really screwing up your withholding or you're really screwing up your tax calculations.

I would pay a tax professional to figure out which.
posted by Jacqueline at 6:48 PM on February 15, 2010

is some of your income from bonuses or commissions? Generally those will qualify for higher withholding to compensate for what they can do to your tax liability, but it could be that the withholding on those amounts is not being adjusted for some reason. Do you itemize or use standard deduction?

If you want to continue to do your own taxes and don't already use turbo tax, start. It may catch deductions you missed. Double check with your payroll departments to make sure they are withholding in the manner you intend. You could switch one of you to single, which would withhold at a higher rate, but that may or may not solve your problem. Claiming married only accounts for standard deductions, it does not does not take into account other household income, so when your income is combined you may be bumped into a higher tax bracket, which causes the discrepancy. Example, alone you each are in the 15% tax bracket, so your taxes reflect as such. If your combined adjusted income puts you in the 25% bracket, you have a problem.

Going to IRS website for a withholding calculator is a great idea as well.
posted by domino at 6:54 AM on February 16, 2010

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