W4 is a tax return form that basically declares how much tax should be withheld by your employer from your paycheck for the next year. Although this has some similarities with tax return form 1040, there are several differences between the two. For one thing, the amount you may be declaring for W4 may not correspond with the one you have for 1040. In theory, these declarations should be of the same amount. However, it seldom works that way.
One of the most important W4 questions is how much exactly tax should an employee pay. The easiest possible answer to this is to simply declare a payable amount of 110% from the previous yearâ€™s total tax liability. This is of course, assuming that you are still earning the same or slightly higher wage amount. If it is not your wont to compute your tax projection from scratch, simply take a copy of your accomplished 1040 tax return form from last year and look at line 56. Here, you will see the amount you have declared after â€śTotal Tax.â€ť Simply take that amount, compute for 10% and add that 10% to the Total Tax amount.
Example: last yearâ€™s declared amount is $10,000. 10% of that would be $1,000. Then this yearâ€™s tax liability should amount to $11,000.
In some cases, you may only be liable to pay 100% of last yearâ€™s tax, so paying for 110% may seem extreme. This is particularly true if your earning capability from last year was under the $150,000 mark; which means that you should only be paying for $10,000 (if we take the abovementioned example as basis.) However, paying for 10% more for this yearâ€™s tax liability projection will provide you the financial safety net in case something unexpected turns up.
December 17 2008 03:18 am | W4 Assistance