W4 withholding calculation

Technical topics regarding tax preparation.
#1
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Hi,

I always have so much trouble with Form W4.

I normally have an end result of withholding that I want e.g. $22,000 for the entire year.

But when I fill out the form for a client, I have zero confidence that it will turn out that way. I wish I could just write in the total withholding amount for the year on the form!

Can someone help me? is there a good calculator I can use? or even a spreadsheet?


Thanks for any advice!!!!
 

#2
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I made a spreadsheet where I took the withholding formulas from Pub. 15-T so I can play with different filing statuses (based on the annual wages I enter into the spreadsheet) and see if the total tax withheld will add up to the right amount. I use this all the time to back into a withholding status that will work for the W-4's I give to clients with their tax returns. Send me a message and I can e-mail it to you.

However, you have to watch out for clients that get a lot of supplemental wages (such as stock options or large bonuses) that are withheld at a flat 22% rate. That can throw things off.

Alternatively, you can set up a dummy client/employee in your payroll software and play with it there, changing the withholding status and entering in a paycheck to see what the withholding turns out to be.
 

#3
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I tried that calculation for a married couple last year, each earning over $100k. I even watched the darn video (I HATE VIDEOS!), or part of it anyways. After 1 hour I still couldn't get to anything that made sense.

I also spent 2 hours spreadsheeting it (I do love spreadsheets), and still couldn't get it right.

Like you, I knew how much they needed to pay for the year. I'm not sure how anyone can make sense of the simplified(?) method, I felt like an idiot.

So I went back to the old tried and trued Irish method taught to me by my first mentor. It takes 30 seconds or less. EVERYONE, regardless of age, income or marital status is Single, zero dependents, plus $50 (or $100 or whatever) extra withheld. I tell my clients that they MUST have me figure their W-4 if they change jobs, and I then send them a preprinted one to give to their HR department.

The result? Next year they will get refunds (If not, add more to the plus $50), they will be very happy, they will not take up endless hours, emails and phone calls asking "Why didn't I get a refund?". They tell their friends you are a genius, and you can now raise their fee.

If they complain about the extra withholding, and that has only happened twice in 30 years, I tell them it is just temporary to catch up on their underwithholding year to date and we will adjust it next year, by which time they have forgotten all about it.

It is always easier to get someone to "Try" something than to "Do" something, so my conversation always starts with "Let's try this...."
 

#4
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Sounds good.

Personally, I like to find a withholding status that will match the withholding tax bracket to their actual marginal tax rate. That way, if they get a raise or change their 401(k) amount, the amount of tax withheld ends up automatically changing by the correct percentage. This is especially helpful when one spouse has high income and the other spouse has moderately low income - maybe I'll check the MFS box and the box on 2c that says 2 Jobs, for the smaller job. For example, if they get a $10k raise and they're in the 22% tax bracket, but their employer withholds only an extra 12%, that reduces next year's refund by $1k (or causes them to owe $1k), which I would like to avoid.
 

#5
CathysTaxes  
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I like to use the tax planner in Drake. You charge them extra and if done correctly and the Bozos in DC don't go crazy with retro tax changes, it's very close.
Cathy
CathysTaxes
 

#6
Taxaway  
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I would love it if the W4 format included a percentage option.

Although I tell each client their effective tax rate, when the client owes, particularly when they have other income sources not subject to withholding, show them their W2 withholding % to reveal the 'shortage.' Other than cases where making estimated payments might be more appropriate, I tell them to ask for the shortage/pay periods as the additional withholding.
 

#7
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Have you tried using the tax withholding estimator on the IRS website? (https://www.irs.gov/individuals/tax-withholding-estimator)

This is somewhat helpful, especially if the client has a consistent salary. If my client has a balance due several years in a row, I generally request a copy of their latest pay stub and add the information to the calculator and then forward the results to them so they can update their respective W-4’s with their employers.
 

#8
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Thanks for all the feedback. I have tried the IRS withholding estimator tool and found it frustrating.

If i were doing my own taxes I would just do things incrementally, but clients normally will want an accurate withholding amount first time - which is understandable.
Beardenjv is going to send a spreadsheet, so I will give that a shot.
 

#9
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telaxman wrote:Thanks for all the feedback. I have tried the IRS withholding estimator tool and found it frustrating.


Probably not as frustrating as having to maintain a spreadsheet will all of the year-over-year changes. :)

No reason to recreate the wheel IMO. The IRS online calc works for the overwhelming majority of situations.
 

#10
Frankly  
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ManVsTax wrote:No reason to recreate the wheel IMO. The IRS online calc works for the overwhelming majority of situations.
I like to use the tax planner module of my tax prep software to project tax liability. The IRS withholding calculator has no provision to input expected tax liability and get an appropriate W-4. It's impossible to use the calculator and know what the withholding is going to be.
 

#11
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Frankly wrote:The IRS withholding calculator has no provision to input expected tax liability


Because it calculates liability based on income and other relevant inputs. There isn't any need to input tax liability.

Frankly wrote:It's impossible to use the calculator and know what the withholding is going to be.


The calc tells you expected tax liability and it tells you how much you'll be overpaid or under-withheld. It's not that hard to use a calculator to figure out withholding based on that.
 

#12
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I use a payroll withholding calculator inputting only the annual wage and filing status (of my choice, usually single). This gives me a baseline of the total withholding for a full year (including the state computation). I take the shortfall, divide it by the number of pay periods in the year, and put that on the W-4 as additional w/h per pay period.

Because this change is usually occurring in March or April, I may adjust this additional amount for the current year to make up for any shortfall for the first few months and also because the number of remaining pay periods is less than a year. This requires (2) W-4’s: one to be submitted now and one to be submitted in January. Assuming the projection for the upcoming year is the same for the subsequent year, this results in adequate withholding.

Either that or I just do one if the client agrees to a reduced balance due for the coming year. The subsequent year will have adequate withholding. Most go for this option.
 


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