Client wants to know if they increase their 401k contribution, will the employer also reduce their federal withholding. I would think so but I can't find a definitive answer. They are subject to safe harbor 110% estimated taxes for 2014 and asked if increasing their 401k contributions would be a viable alternative to the 110%. Good question, I thought. Would appreciate comments. Thanks.
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Depends upon how much they increase the 401(k) contribution. But generally, the withholding will go down. They just need to monitor things and then change the number of exemptions they claim, if necessary. They can even specify an additional amount to withhold via the W-4 if that's what needs to be done. It's early in the year, so they have plenty of time to make whatever adjustments are needed."The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith -
W2 adjust should occur
The employer should automatically adjust withholding to compensate for consideration of any 401(k) plan, or pre-tax insurance, or . . . .
But that action should have zero impact on the importance of meeting the 110% threshold - which is still there, unchanged - to avoid any potential underestimated tax issues. (Actually, it could be a negative for meeting the 110% threshold issue, as less taxes would be prepaid via withholding!)
While we are somewhat mincing words, putting funds into a 401(k) plan will certainly lower his tax liability, but cannot be relied upon to significantly modify his taxes due at the time of filing.
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Employer (or rather probably software) will lower the withholding as it only considers taxable income. So if the TP is trying to compensate because he owes at the end of the year, this alone will not help, unless this lowers his marginal tax bracket -- say from 28% to 15%. He needs to keep the tax withholding the same as before, by claiming less exemptions, or having a fixed $$$ amt come out each pay period.Comment
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