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 for a range of other users to more accurately calculate their taxes. 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 allows a user to enter any self-employment income in addition to wages or pensions. The user is then alerted that they may qualify for several special tax benefits, including the self-employment health insurance deduction or the deduction for contributions to a Simplified Employee Pension (SEP), Savings Incentive Match Plans for Employees (SIMPLE) or other qualified retirement plan.”
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 taxpayer understanding.”
- “The ability to target either a tax due amount close to zero or a refund amount.” 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 and links to help the user quickly determine if they qualify for various tax credits and deductions.” 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, “The estimator then automatically links to the appropriate withholding form. For employees, the link goes to Form W-4, Employee’s Withholding Allowance Certificate (PDF), which they can then fill out and submit to their employer. Similarly, for pension recipients, the link is to Form W-4P, Withholding Certificate for Pension or Annuity Payments, which is submitted to the pension payer.”
It is important that you do not file these forms to the IRS but rather 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 direct to the IRS.
Do a tax payment health check today! You may make the odd mistake when it comes to finance 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.