Recently, the IRS has strongly encouraged taxpayers to conduct a tax checkup. This is because it could save you from being caught off guard by unexpected tax payments in the next year. The government underlined that, if taxpayers did not alter their withholding or make anticipated payments, a considerable proportion of them might end up owing taxes. The IRS suggested that taxpayers utilize their Tax Withholding Estimator tool to help them match their payments to what they owe. This would save them from incurring penalties and experiencing undue stress in the next tax season.
Individuals working in the gig economy, those earning money not subject to withholding taxes, and anyone with a “side hustle” should exercise the most caution. It is recommended that these individuals examine the amount they pay or the amount of tax they have withheld throughout the year to ensure that the tax they pay aligns with what is owed. The IRS has stressed that doing your tax planning now will save you time and energy in the future. Here’s some important information to remember:
How the Process of Refunds Works
The federal taxation system is pay-as-you-go. Taxpayers are obligated to pay taxes anytime they get income or compensation during the year. For many people, their employer deducts taxes from their paychecks, which are subsequently sent to the IRS on their behalf. Some people, such as those who work in the gig economy, are expected to pay quarterly estimated taxes throughout the year. A refund is usually granted when an excessive amount is withheld or paid over the course of a year.
Avoid Being Taken Off Guard By a Bill
On the other hand, many taxpayers face projected tax penalties as a result of underpaying their taxes during the year. The penalty varies depending on the individual, but it might be up to several hundred dollars for some. Modifying the amount of tax deducted from paychecks or estimated tax payments can help you avoid fines.
Self-employed individuals, including those who work in the gig economy, those who have several jobs, and those who have gone through big life changes, such as a recent marriage or childbirth, are especially in need of this information. With all of this in mind, the IRS urges taxpayers to utilize the IRS Tax Withholding Estimator to help them better align their tax withholding or payments with what they owe. You can access this tool here.
Tax Withholding Estimator
The IRS has created a Tax Withholding Estimator to help taxpayers ensure that their tax withholding or payments are in accordance with what they owe. Individuals can use this tool to discover how much federal income tax they are obligated to pay during the year. To use it, taxpayers must provide a copy of their tax return for the year 2023, as well as pay stubs for all occupations or other income information, such as income from side jobs, self-employment, or investment earnings. 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
If a modification in withholding is required following completion, taxpayers must make the necessary adjustments by filing a new Form W-4 to their employer or pension provider. They can also change quarterly anticipated tax payments as needed. Furthermore, the IRS urges individuals to utilize the Tax Withholding Estimator in the case of a substantial change in their lives, such as:
- Any new employment or other paid work
- A major shift in one’s income
- Getting married
- Becoming a parent
- Buying a new property
Consult a Qualified Tax Professional
You can discover more by visiting the IRS’s official website and using their Tax Withholding Estimator tool. Remember that if you have tax-related questions, you should consult with a qualified tax professional.
However, we can also assist you if you’re searching for ways to optimize your financial retirement strategy, such as reducing the impact of taxes on your income in retirement. There are some tax-deferred and tax-free options available that you may not even be aware of. Interested in learning more about how these alternative options can help you? Reach out to us today.
