Witholding Suggestions

[MonicaBees]

Trying to get as close to zero owed each year, not sure how best to handle all the federal and state withholdings for myself and my spouse.

[KatherineS63]

Thank you for your great question.  Here is what I tell everyone.  If you are owing money, the government(s) do not care if it comes from one source of income or multiple so sometimes you can just pick one source and have all the money come from that one source.  For example, if you have multiple employers or retirement accounts maybe pick only the ones you want withholdings to come out of for federal and state.

(some states do not have income taxes so disregard if you are in one of those states)

Then look at these links to learn what a W4 looks like and how to fill one out.

If you have a retirment account, then you might use a W-4 P but there are basically the same.

How to fill out a W4  Instructions on how to fill out a W4

W4 calculator  Use to help fill out a W4

Form W4  Actual W4.  Line 4c is where you would add extra withholdings from each check.

Once you have filled out the W-4, then in a few months maybe use the links below to do a tax estimator.  This will tell you how much you might owe after making the changes.  You can do a tax estimator several times per year.  If you have changed your withholdings mid year, you will want to see that you keep owing less as the year goes on.

IRS Tax estimator This is a tax estimator that will time out so enter and print findings all at one sitting.

Tax caster  This is another tax estimator that will time out so enter and print findings all at one sitting.

I hope you find this information useful.  

For state withholdings, it is hard to find a tax estimator for each state but they will have a state withholdings form that you can fill out.  

Katie S

[Terri Lynn]

Hello MonicaBees!
Thank you for joining us today!

You're aiming for the sweet spot: getting as close to zero owed/refunded as possible. This requires coordinating your withholding for both federal and state taxes, especially since both you and your spouse work. The best strategy involves using the official withholding estimators.

Here's how to approach it for Federal Taxes

For Federal Withholding (IRS)

The key tool is the IRS Tax Withholding Estimator. This is designed precisely for your situation (multiple incomes, aiming for zero balance).

Steps:

1. Gather Your Information:

• Latest Pay Stubs: For both you and your spouse, from all jobs (including any side gigs if you're an employee for them).
• Last Year's Tax Return: Your 2024 tax return will be very helpful for estimating income, deductions, and credits.
• Information on Other Income: If either of you has self-employment income (e.g., from your software development LLC), investment income (interest, dividends, capital gains), or any other income not subject to withholding.
• Deduction/Credit Estimates: Estimate any large deductions you expect to take (beyond the standard deduction) or significant tax credits (e.g., Child Tax Credit, education credits, dependent care credit, self-employed health insurance deduction, deductible IRA contributions).
• Pre-tax Contributions: Amounts contributed to 401(k), health savings accounts (HSAs), or flexible spending accounts (FSAs).

2. Use the IRS Tax Withholding Estimator:

• Go to IRS.gov/W4App.
• Enter all the information you gathered. The tool is designed to account for multiple jobs in a household.
• It will ask about your desired outcome (e.g., a $0 refund/owed, or a small refund). Select "as close to zero as possible."
• Crucial for Married Couples with Two Incomes: The estimator will guide you on how to split the withholding between your two W-4s (or recommend extra withholding on one). It's generally best to only account for dependents and significant deductions/credits on one person's W-4 to avoid under-withholding.

3. Implement the New W-4s:

• The estimator will provide specific instructions for filling out a new Form W-4, Employee's Withholding Certificate, for each job.
• Print these out (or note the exact numbers) and submit a new W-4 to each of your employers' payroll or HR departments.

4. Monitor Throughout the Year:

• Check your first few paychecks after the change to see if the withholding amounts are what you expect.
• Re-run the estimator if there are major life changes (e.g., a raise, new job, new baby, buying a house, significant change in self-employment income, or large deductible expenses).
• It's a good idea to run the estimator again near the end of the year (e.g., November or December) to make any final adjustments to get as close to zero as possible

For State Withholding (General Guidance for Any State)

Each state has its own withholding form and rules. You'll need to find your state's specific form and guidance.

Steps:

1. Identify Your State's Withholding Form:

• Every state with an income tax will have its own version of a W-4. Common names include Form [State Abbreviation]-4 (e.g., California's DE-4, New York's IT-2104).
• Action: Search your state's Department of Revenue (or equivalent tax agency) website for "Employee's Withholding Certificate" or "State W-4." Some states (e.g., New Mexico, North Dakota, Utah) may simply accept the federal W-4 for state withholding.
• Note: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming generally do not have state income tax, so you wouldn't have state withholding.

1. Understand Your State's Form:
   • Your filing status (e.g., Single, Married Filing Jointly).
   • A number of "exemptions" or "allowances" (similar to the old federal W-4). The more allowances you claim, the less tax is withheld.
   • An option for "additional amount of tax to be withheld" per pay period. This is key for fine-tuning.
   • Some states may have specific worksheets for multiple jobs or unique credits.
• Review the instructions for your state's specific withholding form. These forms typically ask for:
2. Coordinate State Withholding with Federal:

• While few states offer online estimators as sophisticated as the IRS's, you can use your federal estimate as a starting point.
• General Principle for Married Couples with Two Incomes: To avoid under-withholding, it's often best for one spouse to claim fewer allowances (e.g., 0 or 1) on their state W-4, and the other spouse to claim the rest, or for both to claim a low number.
• Use the "Additional Withholding" Line: This is your best friend for precision. Once you've set your federal W-4s, you'll have a better idea of your overall tax picture. If you anticipate owing a small amount (or want a small refund) on your state return, you can add a fixed dollar amount to be withheld from each paycheck using this line on one or both of your state W-4s.

     3. State Estimated Tax Payments (Crucial if you have significant non-wage income):

• If you have income not subject to regular state withholding (like self-employment income from your LLC, or significant investment income), you will likely need to make state estimated tax payments throughout the year.
• Thresholds Vary by State: Each state has its own threshold for when estimated payments are required (e.g., if you expect to owe $500, $1,000, or some other amount).
• Payment Schedule: These are typically due quarterly, mirroring the federal schedule: April 15, June 15, September 15, and January 15 of the following year.
• Action: Visit your state's Department of Revenue website and search for "estimated tax payments" or "estimated income tax for individuals" to find the specific requirements and payment methods. Most states allow online payments.

General Tips for Both Federal and State:

• Communication is Key: Talk to your spouse. Coordinate your W-4 and state withholding form settings. If one of you claims all dependents and deductions, the other should claim fewer.
• Be Proactive: Don't wait until December to check your withholding. Review it quarterly or after any major life changes (new job, raise, new baby, buying a home, significant changes in self-employment income).
• Err on the Side of Slightly Over-Withholding: If your absolute priority is to avoid owing taxes, it's safer to over-withhold by a small amount and get a small refund than to under-withhold and face penalties.

For more information see:

• Make Withholding Changes Work for You 
• Tax Withholding, How to get it right  
• IRS Tax Withholding Estimator 

Please feel free to reach backout with any additional questions or concerns you might have!

Have a great rest of your day!

Terri Lynn, EA

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer.”