The best time to update withholding

One of the first things taxpayers should do each year is check their federal income tax withholding. As your clients’ trusted tax professional, you can help them review their options and decide what makes the most sense for their financial situation, or at least remind them to review their paperwork with their employer’s human resources department, if applicable.

Taxpayers and tax pros alike can also use the IRS’s Tax Withholding Estimator tool to help determine the correct amount. This online tool helps to avoid having too much or too little tax withheld from a taxpayer’s wages. It also helps self-employed people make accurate estimated tax payments.

Having too little withheld can result in an unexpected tax bill or even a penalty at tax time. Having too much withheld results in less money in their pocket. Remember, the estimator tool is only as accurate as the information entered. This is one area where tax pros can show value and perhaps add additional billings to your practice.

The estimator tool can help determine if someone should:

• Complete a new Form W-4, Employee’s Withholding Certificate, and submit it to their employer
• Complete a new Form W-4P, Withholding Certificate for Pension or Annuity Payments, and submit it to their payer
• Make an estimated tax payment to the IRS
  • Individuals whose income tax withholding from salary or pension is not enough, or those who have additional income (interest, dividends, alimony, self-employment, etc.), may be required to make estimated payments

To determine proper 2021 withholding amounts, tax pros need to know:

• Their clients’ 2021 incomes
• The number of children to be claimed for the child tax credit and earned income tax credit (if applicable)
• Other items that will affect their clients’ 2021 taxes, such as filing status

The estimator does not ask for personally identifiable information, such as a name, Social Security number, address and bank account numbers. The IRS doesn’t save or record the information entered in the estimator.

Before using the estimator, remind your clients that the following information is needed:

• 2019 tax return
• Most recent pay stubs
• 2020 Form W-2 from employers
• 2020 Form 1099 from banks and other payers
• Forms 1095-A from the marketplace for those claiming the premium tax credit
• Form 1099-NEC, Nonemployee Compensation
• Any other applicable information relevant to the individual’s situation

Most income is taxable, including unemployment compensation, refund interest, and income from the gig economy and virtual currencies. Therefore, taxpayers should also gather any documents from these types of earnings. These documents will help taxpayers estimate 2021 income and answer other questions asked during the process. The IRS also has a Tax Withholding Estimator FAQs to assist with questions about inputting information and the estimator’s results.

Our Developing a Tax Plan for Your Clients on-demand webinar is a great resource if you want more information on how to assist your clients with additional financial opportunities throughout the year.