If you have self-employed income or are retired the IRS has completely revamped its tax withholding calculator for you to get a good estimate as to how much tax you will have to pay. With self-employed and other types of taxpayers often now paying their bill quarterly it is sensible to have a look at the system now so there are no big shocks at the end of the financial year!
Who can use the tax withholding calculator?
Since the platform was launched in 2001, the tax withholding calculator has really only worked for simple tax payments such as those who are solely employed by another organization. You could factor in things like how much you were putting into a college fund, pension and so on and it would give you an estimate, which you would pass on to your employer so they could adjust your payments.
The new tax withholding calculator now allows a range of other users to calculate their taxes more accurately. According to the IRS, these groups now include self-employed, those employed but who have self-employed income, and retirees who still need to declare their incomes.
In using the tax withholding calculator you will be given advice as to any new ways to reduce taxable income or reduce your tax burden too. The IRS state, “Among other things, the estimator lets users enter any self-employment income as well as pensions or wages. Then, the user’s alerted that they might qualify for several special tax benefits, which include the deduction for contributions to a Simplified Employee Pension (SEP) or the self-employment health insurance deduction, Savings Incentive Match Plans for Employees (SIMPLE) or other qualified retirement plans.”
In short, the system can tell you that you owe less tax, not just more! This is another incentive for you to do a monthly or quarterly ‘tax health check’ so there aren’t any nasty surprises when it comes to the final annual tax payment.
Other improvements to the calculator
The IRS hasn’t only added complexity to the withholding calculator – it also claims to have simplified it so you don’t get confused as you work through it.
The improvements include:
- “Plain language throughout to improve understanding of the taxpayer.”
- “The capability to target either a refund amount or a tax due amount close to 0.” This can be adjusted according to your needs.
- “A new progress tracker to help a user know how much more information they need to enter.” You can save your estimate at any time and come back to it.
- “The ability to go back and forth through the steps, correct previous entries and skip questions that don’t apply.”
- “Tips & links to help users immediately determine if they qualify for various tax deductions and credits.” This could result in a nice reduction to your tax bill that you may not have factored in before you sat down to get the estimate.
- “Automatic calculation of the taxable portion of any Social Security benefits.” This can save problems further down the line from taxable income streams you may have missed.
Once all your data is in the system, you will get a withholding calculation for you to work on. It then does something quite clever. The IRS state, “Then, the estimator links to the proper withholding form automatically. For employees, the link goes to Form W-4, Employee’s Withholding Allowance Certificate (PDF), which then they can fill out & submit to their employer. For pension recipients, Similarly, the link is to Form W-4P, Withholding Annuity Payments or Certificate for Pension, which is submitted to the pension payer.”
It is important that you do not file these forms to the IRS but rather to those parties who will be paying you your income. This could mean your pension fund or employer, though with self-employment income you will be paying those amounts yourself directly to the IRS.
Do a tax payment health check today! You may make the odd mistake when it comes to financing payments (a missed credit card bill for example) but the IRS really aren’t the right people to get into a mess with. They have tremendous powers when it comes to delinquent taxes and it pays for you to be ahead of the game. The tax withholding calculator is there so you at least know your position with them, and can prepare for that most urgent of payments ahead of the game.