Stay Ahead of Law Changes & Protect Yourself Against Being Audited: Corporate Transparency Act and Reasonable Compensation

How much money should I withhold from my paycheck?

This topic is one of those should be really simple things, that is so far from simple it is absurd. The simplest way to answer it, would be the very basic – it needs to be enough to satisfy the tax impact your earnings create. If you will owe IRS $2,000.00 because of how much you make, you need to withhold $2,000.00 from your paycheck. Sadly, no one knows how much they will make exactly this coming calendar year (unless you have magical powers) and thus cannot know exactly how much to withhold. You do however have a tax return from last year you can reference, and plan from.

I would like to first, however, talk about withholding in general. This is arguably the MOST impactful number in the entire tax return. More important than deductions, more important than anything. If I were to describe the tax return in words, it would be your income of ‘A’ creates a total amount of tax which is ‘B’. You then simply compare ‘B’ to how much you already paid which is ‘C’. ‘C’ is the amount that was taken out of your gross check and sent to the United States Treasury, and why seeing the gross check vs your net check makes you sad and angry at the same time. The difference between ‘B’ and ‘C’ is either your refund or balance due. It really is that ‘simple’.

If you owe taxes to IRS every year, there are a small variety of things you can do to help reduce your tax burden less year. However, the way to spend the least amount of dollars to reduce your tax bill in leaps and bounds, is to increase your withholding on your paycheck. If you withhold an extra $500.00 over the whole year, you will owe $500.00 less. It is dollar for dollar. Putting money into retirement helps, deductions help… but neither are on a dollar for dollar scale. It may take $2000.00 in contributions to your 401k to make a $500.00 change in tax versus making a $500.00 change to withholding to make a $500.00 change to your tax bill. No one likes to hear it, but that is the simple and honest truth.

The topic at hand is determining how much to withhold from your paycheck. It is based on a lot of information. How much income do you have? What other income do you have? What deductions do you have? Are you married? Does your spouse work? Do you have kids? Anyone in college? Do you put money to retirement outside of your paycheck? The list doesn’t end there. The best way to determine how much your paycheck needs to withhold, is based on your last years tax return. Where were you last year for tax purposes? Did you owe money? Did you have a big refund? What needs to be different? If you owed money, your withholding on your paycheck needs to increase. If you got a big refund and would rather have access to those funds during the year, you need to reduce your withholding.

The way to change the withholding on your paycheck, is on the form W4. https://www.irs.gov/pub/irs-pdf/fw4.pdf

Don’t be intimidated by all the information on the pages. The bottom of the first page is the actual form. The rest is just information. You can read it all or just read this blog.

  • Boxes 1 and 2 of the W4 is your vital info – fill it in.
  • Box 3 is what looks like your filing status, but don’t be fooled. Box 3 determines what math tables your payroll or HR is going to use when calculating your withholding – that is all. The W4 doesn’t dictate the filing status of your tax return. Single is a higher, Married is lower. Married but at the higher single rate, is equal to Single. The 3rd box is what you would check if you are legally married but need your paycheck to be withholding tax at a higher rate.
  • Box 5 references allowances and a worksheet. You can do the worksheet if you wish, you do NOT have to. 0 allowances, means withhold at the highest rate on the table you just told payroll to use (single, married, or married at the single rate). This is a percentage of your pay and will scale as your income scales – which is a good thing. The higher the number you put in box 5, the more you are saying you are exempt from tax. It will lower the amount of tax being taken from your check and increase how much you get on your net paycheck. Please do not make the mistake of putting too high a number here, it will reduce your tax withheld to a very small amount and you are at a much higher risk of owing money to the IRS come April 15. As the worksheet goes A-G, the allowances shouldn’t really go higher than 7. Really any allowances after 4 or 5 mean almost nothing coming out of your check for federal withholding. Social security and medicare tax is a flat amount and you are not able to change that ever.
  • Box 6 is a special box. It allows you to add a flat dollar amount per paycheck to withholding. It is a number you can calculate with exactness and know exactly how much more will come out of your paycheck. It can be a very handy tool. The catch is that it does not scale as your pay scales and will need to be modified each time you have an increase in pay.
  • Box 7 is a box that should have a big HAZARD DANGEROUS MATERIALS INSIDE label on it. Don’t fill this in without consulting with an older wiser person, preferably one who sits atop mountains dispensing sage advice for those willing to brave the elements seeking such wisdom. It can be effective for taxpayers in unique situations – such as a child in college making a couple thousand dollars all year.

In the end, what are your particular needs? Everyone’s needs are different. What do you need to change on your W4?

Do you need to increase your withholding because you owe year to year?

Lower your allowances in box 5, and or change to single / married, but withhold… in box 3

Do you have too much of a refund and want to keep some during the year?

Increase your allowances in box 5 of the W4, do the opposite of the above question

I just started a new job, what do I put down?

What did you put down at your last job? You likely need to at least the same, hopefully the new job is a higher paying job and you need to increase your total withholding a little bit.

I have no idea what I’m doing or how to read a tax return, why won’t you just give me an answer?

Single with 0 allowances on line 5. Sign and return to HR.

 Charles Steinmetz
 Senior Tax Professional

The Molen & Associates Difference

Mike Forsyth

“Super helpful and timely. This is our first year with them and we look forward to trusting them with our taxes and business books for years to come.”

Caitlin Daulong

“Molen & Associates is amazing! They run an incredibly streamlined process, which makes filing taxes a breeze. So impressed with their attention to detail, organization, and swift execution every year. Cannot recommend them enough!”

Sy Sahrai

“I’ve been with Mr. Molen’s company for few years and I felt treated like family respect and dignity. They are caring, professional and honest, which hard to find these days. Love working with them.”

2024-2025 Tax Updates

2024-2025 Tax Updates: Key Changes, Strategies, and What You Need to Know As we approach the end of 2024, it's essential to stay informed about the tax changes that will impact your upcoming filings. The Internal Revenue Service (IRS) has announced several updates for...

Required Minimum Distributions (RMDs): What Are They and Why Are They Required?

Required Minimum Distributions (RMDs): What Are They and Why Are They Required? As retirement approaches, understanding the rules around Required Minimum Distributions (RMDs) becomes crucial for anyone with a retirement account. RMDs are mandatory withdrawals that...

HRA 105 Reimbursement Plan: A Comprehensive Guide for Businesses

In today's evolving healthcare landscape, businesses of all sizes are searching for cost-effective ways to provide health benefits to their employees. One increasingly popular solution is the HRA 105 Reimbursement Plan. This plan offers flexibility, tax advantages,...

Do I Need to Pay Taxes on Payments Received in Cash?

Receiving payments in cash might seem like a simple and hassle-free way to manage your finances, especially if you're a freelancer, small business owner, or even just doing a few side gigs. However, while cash payments are convenient, they come with responsibilities...

Bonus Depreciation: Maximizing Tax Benefits for Businesses

Bonus depreciation is a powerful tax incentive that allows businesses to accelerate the depreciation of qualified property, thereby reducing taxable income and enhancing cash flow. This article delves into the intricacies of bonus depreciation, its eligibility...

Which Accounting Software to Use – QBD, QBO, Excel, NetSuite, Wave, Xero, etc.

In today's digital age, choosing the right accounting software is crucial for businesses of all sizes. With numerous options available, it can be challenging to determine which software best suits your needs. This article will explore some of the most popular...

Personal Property – Primary Residence Capital Gains Exclusion: How Does This Work?

The capital gains exclusion for the sale of a primary residence is a significant tax benefit available to homeowners in the United States. This exclusion allows taxpayers to exclude a substantial portion of the gain realized from the sale of their primary residence...

Personal Property – Primary Residence Capital Gains Exclusion: How Does This Work?

Personal Property – Primary Residence Capital Gains Exclusion: How Does This Work? The capital gains exclusion for the sale of a primary residence is a significant tax benefit available to homeowners in the United States. This exclusion allows taxpayers to exclude a...

Compensation and K-1 Reporting for Partnership Owners

As a business owner of a partnership, understanding how your compensation and earnings are reported and taxed is crucial for managing your finances and staying compliant with IRS regulations. Unlike S-Corporations (S-Corps), partnerships cannot pay their owners a W-2...

W-2 Salary vs. Distributions vs. K-1 for S-Corp Owners

W-2 Salary vs. Distributions vs. K-1 for S-Corp Owners As an S-Corporation (S-Corp) owner, understanding the distinctions between W-2 wages, distributions, and K-1 profits is essential for managing your tax obligations and business finances. In this article, we will...

Request an Appointment Today

7 + 4 =

Call us at

Pin It on Pinterest

Share This