Underpayment Penalty

[dknokey]

How do I avoid paying so many taxes at the end of the year and incur a penalty for underpayment throughout the year? I don't understand the w4 calculator. 

[FranklinF]

In general, UNDERPAYMENT OF ESTIMATED TAX PENALTIES can be avoided if:

• You owe LESS THAN $1,000 after subtracting withholdings and credits, OR
• If you paid the smaller of:
  -> AT LEAST 90% of the Tax for the CURRENT YEAR Tax Return, OR
  -> 100% of the Tax from the PRIOR YEAR Tax Return.
  
  Based on your paystubs you can estimate if you potentially will be facing penalties and you can make adjustments on your IRS Form W-4 accordingly. In addition, the IRS (and others) provide a calculator to perform these estimates.
  
  About Form W-4, Employee's Withholding Certificate 
  Tax Withholding Estimator 
  
  
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[FranklinF]

W-4 TAX CALCULATOR

The new W-4 design by the IRS is intended to REDUCE complexity and INCREASE both transparency and accuracy of the withholding system. as it replaces complicated worksheets from the previous version with more straightforward questions that makes things easier.

The form has 5 steps. BOTH Step 1 (personal information) and Step 5 (signature) are MANDATORY, where you sign the form. Steps 2 - 4 are optional but completing them increase accuracy should they apply to you.

THE NEW VERSION IS TRULY USER FRIENDLY and what you need to have available are the following:

• Paystubs for all jobs (spouse too)
• Other income info (side jobs, self-employment, investments, etc.)
• Most recent tax return
  
  Tax Withholding Estimator 
  
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