Anyone for some Friday math fun?

[kathyc2]

If my clients want help with more accurate withholding and estimates, I don't rely at all on the withholding tables. I figure out where their current withholding, whatever it is, puts them at the end of the year, and then I suggest adjustments ONLY to the "additional amount per pay period" number, I do not tell them to change anything else on the W-4, except maybe once at the first pay period of the new year (i.e. no changes mid year, only "additional amount per pay period"). Or, if they don't want to pay me for that analysis, then I just tell them their effective tax rate the prior year (usually between 10-25% for these clients), and then look at their most recent paystub, and see if the withholding so far is at least that much (percent) of their taxable gross.

There are times where this approach would work, other times when it would not. Say client is not having sufficient withholding based on status/number of exemptions, and you calculate x amount more needs to be withheld per paycheck. After you give them this amount, their income increases (raise or more overtime). When you calculated flat amount they were in the top end of 12% marginal rate, but the increased pay will all be at the 22% marginal rate. The flat amount will not be sufficient to cover the shortage from incorrect status/number of exemptions.

Here's another thing to consider with flat dollar amount: You do a mid year check-up and determine they will need 2K additional withheld to break even. Unless that amount is adjusted down the following year, they will have too much withheld in that year. Client may be okay with it as it will be a refund that year, but just something to keep in mind.