Withholding tables (high income earners)

[ILLMAS]

Does anyone know at what point the federal withholding tables do not work and the employee ends up owning money because there was not enough withholdings even if they claim zero dependents?  Or if someone knows of any article that would be useful to show to clients why this happens to high income earners more often.

Thanks and happy Friday to all.

[Lynn EA USTCP in Louisiana]

Have you reviewed the withholding tables in Pub 15?

Probably one reason the high earners owe is that their withholding is based solely on their W2 earnings.  In my experience often the high earners also have high levels of interest, dividends and capital gains.

 

[Medlin Software, Dennis]

<Payroll hat> PUB 15 is what employers MUST follow, for the last valid W4 the employee provides.  Whether or not it meets the needs of the employee is up to the employee to determine.  Employers have enough to worry about and have no business delving into or discussing whether or not the withheld amount will accomplish what the employee is hoping to accomplish. </Payroll hat>

If someone ends up owing, the preparer likely can offer advice as to the estimated total liability based on estimated earnings for the next year.  If the person is not making any other tax deposits besides withholding, it is easy to divide liability by paydays per year.  That amount, if not what is withheld already, can be achieved by creating and submitting a new valid W4, with an amount in the additional withholding area.

While not proper, many will set their W4 as married and a high number of allowances, and try to get their employer to essentially withhold a fixed amount via the "additional" withholding field on the W4.

Some will use a W4 which results in zero withholding, and make regular deposits on their own.

Some will do a combination, where they check their liability before the end of year, and make a deposit just before end of year (me) if needed.  (I am not fond of loaning money to anyone for free, so I seek no refund, and want to owe just below the under withholding threshold.)

[ILLMAS]

I should of mention that this is as of a result of a large bonus, not salary.

[Medlin Software, Dennis]

The employer has several ways to pay a bonus (Per Pub 15).  Some are easier for the employer (adding it to the next regular check, what most will do) and some are more accurate for the employee.  Sounds like the employer did what most do, and the employee did not recognize the consequences.  Employer did nothing wrong.  Employee has to be aware that the proper deposit amount through the year (via withholding or other means) is their personal responsibility.  The calculation which is likely best for the employee is too complicated for most to figure out... and employees HATE it when they get a bonus with any withholding...  Get many who ask how to give a bonus with no withholding.  This means employers will always take the easy way, and not use the annual; method, or the maximum method.

Your situation is something I hear OFTEN from employers.  They get a complaint form an employee that the employer did not withhold enough.  I have to point out the employer has a simple (but complicated) requirement, and it is not to make sure the employee does not owe, or get a refund...

Sounds like a good way to increase off season business, offer a mid or 3/4 year withholding review.  Roll it into the prior year fee so it appears "free" the next year?

Not too far back, the withholding tables were overly :"heavy".  Employees who claimed the obvious would get relatively large refunds every year.  One of the Bush presidents took advantage, and lowered the withholding to something close to accurate (at least for single earning households), and called it tax relief.  I remember having to claim double dependents to get close to even, then having to claim one less than actual to get even.  (Now I self manage, and withhold zero until December, but not many have that option.)

[Abby Normal]

Married couples who work and don't choose to withhold at the single rate will owe. If one spouse has a low wage, they never have enough withheld.

I wish they would let people choose a flat % instead of having to Married but withhold at higher single rate with 0 allowances and $x additional tax. That's just too complicated. I tell clients they need x% withheld and they ask me how to do that, so I send them to paycheck city or do it for them.

[Medlin Software, Dennis]

Careful, my SWMBO would object.  Just because she does not have taxable earnings does not mean she works or earns less than I do

Back in the last century, when SWMBO was getting taxable pay, we set her to withhold nothing.  It was for appearance, as it irritated her to get such a small net check for her part time gig.  I raised my WH to make up the difference.

I hear often the employee says their (insert name here, could be tax person, friend, neighbor, person next to them on the bus) said to withhold a flat %.  Makes me cringe, since there is no proper way for the employer to comply, so it puts the employee, employer, and advice giver at odds, and sometimes involves a fourth party (me!).  IMO the flat % advice is worthless as the employee has to translate the flat % to some allowable combination on a W4.  My suggestion would be to calculate an actual liability amount for the year, plus some % cushion over, plus let the client choose their hoped for refund.  With the projected liability, and cushion amount, the chances of being at under withhold penalty are nil.  Divide that amount by their pay frequency, and give them that number as the amount to watch for.  Then they have something they can compare apples to apples on their stub, and can adjust easily, via W4.  Have them check in 1/2 way and 3/4 through the year by sending an image of their current stubs.  Seconds to review and suggest changes.

 

[Catherine]

CFS tax software has a cheap (about $40) W4 calculator that works pretty doggone well.  You can strong-arm it (meaning, over-ride just about every field) to get a quick answer, or fill out every detail screen to fine-tune including allowing for YTD withheld tax.  Or anything in between.  Send new W-4 to client (and spouse), boom you're done.  They have a form to hand in to HR, and it takes less time than trying to explain the nuances to clients.     

[SaraEA]

The problem with the approach being recommended here is that the new withholding amounts don't start on Jan 1.  By the time clients come to us, we calculate new withholding amounts, they turn the W4 into HR, and a pay cycle or two go by before the change takes effect, it's March or April or May.  They will still owe next year.  Be sure to warn them.

I HATE having to calculate withholding amounts.  I believe you can have 10 people or 10 software applications using the same Pub 15 and will get 10 different answers.  For this reason I always suggest mid-year checkups.  A few actually take advantage, but only a few.  The rest repeat the screaming and hollering the next year.  Always OVERestimate.

[Catherine]

11 hours ago, SaraEA said:

By the time clients come to us, we calculate new withholding amounts, they turn the W4 into HR, and a pay cycle or two go by before the change takes effect, it's March or April or May.  They will still owe next year.

FWIW, the CFS calculator can take YTD earnings and withheld tax into account.  But then the client needs *another* new W-4 for the next January...