withholdings from employees wages

[POCAHONTAS]

Ok so I am new at this and have never done payroll, so here is the question when a client asks how many shall I withhold for next year so I do not owe any money? How would I figure that out for them. I downloaded pub 15 but there is the percentage method and then there is a table for single married etc which shows up to 10 withholdings. I think I understand it but want to make sure that I understand it fully and would be grateful for any suggestions.

Thank you

[S T]

Software

There are probably several good software calculators available. I utilize CFS software for tax projections, W-4 caculations, etc. The W-4 will do gross to net and net to gross so it is a very handy tool.

Sandy

[Snaggletooth]

Common Question

Pocahontas, this is a very common question, but outside of trial and error, very seldom is successfully addressed. For this reason, try to avoid putting yourself in a position where if it doesn't work, they can blame you. They will expect a refund/due of + or - $100, and it is only luck if you can get this close.

This can be methodically calculated to be very close, but the reality is the taxpayers will almost always undergo a change in the income they project. Then there will be the bickering about which spouse has to have the most withheld, and the correct answer is that it doesn't matter so long as they are filing joint. The math doesn't matter, but try telling THEM that.

I'll stop whining and at least answer your question. Essentially, you must file an imaginery return for NEXT year, using the rates in effect for NEXT year. Then you must calculate their net tax liability AFTER credits and other taxes. The tax liability is your target.

To "hit" the target, consult the withholding tables for both parties. To save time, use the percentage method under the "Annual" payroll. Keep playing with the dependency exemptions until you can most nearly approximate the "target" mentioned above. In addition to the number of exemptions, you can also play with the "Single" filing status instead of "married." You will have to do this for both the husband's and wife's paycheck.
Use Pub 15 (Circular E).

There is not a year that passes that I am not asked the same question several times. But we are rarely successful. The woman gets pregnant and quits work. The guy taps into his retirement account and has to pay not only the tax but the penalty. One of them gets laid off, draws unemployment and doesn't have taxes deducted from unemployment.

Good luck to you Pocahontas. Maybe you can find a John Smith in your area and be a protege.

[POCAHONTAS]

Thank you Snaggletooth

Thank you so much for taking the time to explain, I did download pub 15 (Circular E) and wasn't too sure which method to use for determining withholdings, and I certainly don't mind reading whatever you have to say I do not take it as "whining" but the more input you give me the more I will learn so thanks again.

[JohnH]

Good Advice

You got some very good advice on calculating withholding. It's a real pain, and if you get it wrong the client wants to blame somebody so you get to be the one. Do this often enough and you'll eventually have somebody expecting you to help pay the difference, or at least demanding that you prepare their return for free. Some people are always looking for someone else to absolve them of any responsibility.

If they press me about it, I do the projections and come up with their estimated total tax liability, which I caution them will only be accurate IF their have no changes in their income, exemptions, or deductions. I give them that figure, show them how much it averages per pay priod, and tell them to monitor their total withholding - if their withholding doesn't come close to the total then it's their responsibility to change their exemptions. I make it clear that I can't monitor this for them - they have to do their part.

I also offer them the ultimate solution, especially if they hit me with the "I want to be sure I don't have to pay" routine. I always tell them that if they have no unwithheld income, and if there isn't a huge disparity between the two spouse's incomes, they can be pretty sure they will be overpaid if they claim Single with no exemptions, but even then I can't make any guarantees.

[Black Bart]

Dear Pokey,

The folks above know whereof they speak -- it's nowhere near an exact science, but Snag (and John and Sandy) knows lotsa stuff and is steering you in the right direction.

Just to put my (realistically-priced) two cents worth in: I usually get asked about withholding when they pick up their tax returns and owe $100 and up (everybody expects a refund nowadays) . As the guys said, things change and it's a long shot to get in the ball park, but you have to act like you know what you're doing. For those occasions when you don't have time to do it "right" (and since the mere sight of the top part of a W-4 form puts me into a state of deep depression), I herewith offer a "quick and dirty" (as the tax seminar speakers like to say) solution: (1) Ask what they think their income will be next year. (2) They'll say "About the same." (3) Divide the amount of tax they ended up owing by 52 (weeks) (4) Give them a W-4 and tell them to write in that amount on line six (Additional amount, if any, you want withheld from each paycheck). If their situation truly does remain "about the same," then they'll get a small refund next year since standard deductions/exemptions/EIC increase each year (it doesn't hurt to leave yourself a little leeway by using this year's rates). This quick fix is only good for (maybe) the next year, so it's better if you get their exemptions fixed by advising they drop at least one, or, if they owe a lot ($1,000 and up), to claim zero exemptions.

Now; the above concocted advice/hogwash is dispensed "as is" with no warranty, express or implied, and is to be used only if (pick one or more) you're (1) desperate (2) one of those accountants to whom $500 either way is "close enough" (3) an Acquarius.

Good luck. And remember (as my insuance agent told me upon issuing my life policy); no suicide for two years.

[joanmcq]

One of my favorite clients is one that has complicated investments and does not want to 'lend the government money at no interest'. In other words, one of the few that doesn't view getting a refund as a good thing! He wants to owe between $100 and $900. Last year I had to tell him he screwed up and was getting some back...

[BOB W]

The first thing I tell this type of request is:

Whatever I come up with will not be exact because there are too many variables going forward, but it should be in the ballpark, give or take $500.

I use the prior year's tax return and plug in the changes as a tempory override. This gets me to their new tax liability.

I then compare to last years liability for the difference.

Using their refund or balance due I compute the $$ difference from each return.

I use an $800 per exemption to determine + or - exemption adjustment. Lower income returns I may go to $600 per exemption.

Sometime I just tell them to add addition tax w/h to a new W-4.

Nobody ever asks me to this computation for January 1st. So you need to account for the months using the old w/h when making an adjustment.