The IRS has been urging taxpayers to perform a tax checkup recently. This is to hopefully help you prevent getting unexpected tax bills in the next year. The agency underlined that many taxpayers would find themselves in a situation where they owed taxes if they did not change their withholding or make anticipated payments. Using their Tax Withholding Estimator tool will help consumers match their tax payments to their owed amount, said the IRS. This may help them to stay free from penalties and needless worry during tax season.
Those who should exercise the most caution are those working in the gig economy, those whose income is not subject to withholding, and anyone with a “side hustle.” To get the tax they pay more in line with what is owed, these people should review the amount they pay or the amount of tax they have deducted over the year. The IRS reminds consumers that starting tax planning now will help them save time and aggravation later down road. Here are some salient facts to consider.
How Refunds Work
The federal tax system operates pay-as-you-go. Taxpayers must pay taxes when they receive income or wages throughout the year. Employers often take taxes from employees’ paychecks and forward them to the IRS on their behalf. Some people, like those in the gig economy, have quarterly estimated tax obligations year round. Usually, either too much paid or deducted throughout the year results in a refund.
Avoid Letting a Bill Take You Off Guard
On the other hand, underpaying their taxes all year long causes many taxpayers to pay expected tax penalties. Although each person’s penalty is different, for some, it could be several hundred dollars. One good approach to prevent penalties is to change the amount of estimated tax payments or tax deducted from paychecks.
Particularly in need of this material are self-employed people—including those engaged in the gig economy, those who hold multiple jobs, and those who have gone through major life events like a recent marriage or child birth. Given all this, the IRS advises taxpayers to use their Tax Withholding Estimator tool to help them better match their tax withholding or tax payments with what they owe. You can access this tool here.
The IRS’ Tax Withholding Estimator
The Tax Withholding Estimator, developed by the IRS, helps consumers make sure their tax withholding or tax payments match their obligations. Those who use this tool can find out how much federal income tax they owe throughout the year. All that taxpayers need to use it is a copy of their tax return for 2023, together with pay stubs for every job or other source of income, including income from side businesses, self-employment, or investment income. The Tax Withholding Estimator can help with:
- Estimating your federal income tax withholding
- Determining how a refund, take-home pay, or tax due is affected by withholding amounts
- Selecting an estimated withholding amount that is suitable for yourself and your family
Should a change in withholding prove necessary upon completion, taxpayers must make the required adjustments to their withholding by sending a fresh Form W-4 to their pension provider or employer. When called for, they can also change the quarterly projected tax payments. Furthermore, the IRS advised using the Tax Withholding Estimator should a major life change occur. Such changes could include:
- Any new employment or other paid work
- A major shift in one’s income
- Getting married or becoming a parent
- Buying a new home
Consult a Tax Professional
Making use of the Tax Withholding Estimator tool on the official IRS website will help you learn more. Also, remember that you should see a qualified tax advisor for questions specific to taxes. However, if you’re looking for ways to enhance your financial retirement strategy, including lessening the negative impact of taxes on your savings, we may be able to assist you. There might be some tax-deferred and tax-free options you aren’t even aware of. These tools can help protect more of your hard-earned money. Would you be interested in learning more? get in touch with us.
