Withholding…My Way!

Q.  As a payroll person, I often see highly-compensated employees come to my office with advice from their accountant.   “If you withhold exactly this amount every period, you won’t owe or need to be refunded very much on income taxes.”  Because the accountant may take into account things that would not be known to a payroll system, they think this will be more accurate.  I thought withholding was based on allowances and filing status.

A. The answer to this dilemma for all payroll departments is clear in Publication 15.  Here it is: “The amount of any federal income tax withholding must be based on marital status and withholding allowances. Your employees may not base their withholding amounts on a fixed dollar amount or percentage. However, an employee may specify a dollar amount to be withheld in addition to the amount of withholding based on filing status and withholding allowances claimed on Form W-4.”  What does that mean?  It does NOT say if you are an executive or highly compensated that the accountant can choose my withholding method.  It DOES say to base withholding on the Form W-4 values, filing status and number of allowances.

Here is an example.  Let’s say I make $110,000 per year, am married with two kids under 12 and have a substantial mortgage and some charitable giving.  My accountant says I should have $19,000 in withholding for the year.  Since I am paid semi-monthly, that means 19000/24 or about $791 per check in federal withholding right?  Wrong.  To properly calculate this, visit the free Paycheck Calculator at PaycheckCity.com.  Plugging in the numbers, and playing around with the allowance value and filing status, I see that if I claim single with 2 allowances, I will get around $19,000 in federal withholding for the year.   Thus, I will complete my W-4 with those values.  It’s really a handy tool and it solves the dilemma presented above.

On a side note, just because you are married, you are not required to have taxes withheld using the married filing status.  The object is to get your payments (withholding) and liability (tax return) to match using the tools provided on the Form W-4.