A Mountain of Withholding Forms

Q. My paycheck is wildly different each time because I am paid commission in the 2nd check and a draw on the first check of the month.  I submit a new W-4 each period to keep my withholding down.  Now my payroll department doesn’t want to accept more than 1 change each month.  Is this legal?

A. Probably without knowing it, your question is very similar to the following scenario: I only want to contribute to my 401(k) when the market will go up the next day.  So as soon as I know, let me buy in at the price that existed this morning so I don’t lose any of the gain.  That is of course an absurd proposition, you must take the risk with the rest of the market.   How does this apply to my W-4?

Withholding is the most basic component of your tax planning strategy.  To get the correct amount of withholding is to match your liability with your payments as closely as possible.  Because the W-4 does not allow employees to pick a percentage of each check for withholding, you have to use allowances and filing status to reach the correct number.  By changing your withholding each time, you are not following the consistency principle and are creating way more work for everyone.  A better strategy is to meet with your tax planner or accountant and see what number of withholding allowances would help you reach your ultimate tax liability number based on last year’s income.  In October of each year, you can go through the worksheets of Publication 919 to estimate your liability for the current year.  If it looks like you will not have enough withholding, you can adjust your withholding allowances down.  If it looks like you will have too much withholding, you can adjust your withholding allowances up, keeping in mind that you may need to change things again at the first of the year.

Regarding the legality of only accepting one W-4 per month, you may be slightly mistaken in what they said.  According to page 7 of Publication 919, “If the change is for the current year, your employer must put your new Form W-4 into effect no later than the start of the first payroll period ending on or after the 30th day after the day on which you give your employer your revised Form W-4. If the change is for next year, your new Form W-4 will not take effect until next year.”  Your payroll department doesn’t even have to put your change request into the system until the next month.  If payroll departments enforced this, it would certainly cut down on frivolous changes.

No Comments

No comments yet.

RSS feed for comments on this post. TrackBack URI

Leave a comment

You must be logged in to post a comment.