#payroll

If you fail to estimate your federal income tax withholding properly, it may cost you in a variety of ways. If you receive an income tax refund, it essentially means that you provided the IRS with an interest-free loan during the year. By comparison, if you owe taxes when you file your return, you may have to scramble for cash at tax time — and possibly owe interest and penalties to the IRS as well.

When determining the correct withholding amount for your salary or wages, your objective should be to have just enough taxes withheld to prevent you from incurring penalties when your tax return is due (you may owe some money at the time you file your return, but it shouldn’t be much). You can accomplish this by reading and understanding IRS Publication 505, properly completing Form W-4 (and accompanying worksheets), and providing an updated Form W-4 to your employer when your circumstances change significantly.

Form W-4

Two factors determine the amount of income tax that your employer withholds from your regular pay: the amount you earn and the information you provide on Form W-4. This form asks you for three pieces of information:

• The number of withholding allowances you want to claim: You can claim up to the maximum number you’re entitled to, claim less than you’re entitled to, or claim zero.
• Whether you want taxes to be withheld at the single, married, or married with tax withheld at single rate: The married status, which is associated with a lower withholding rate, should generally be selected only by those taxpayers who are married and file a joint return. Those who are married and file separately should select married with tax withheld at single rate.
• The additional amount (if any) you want withheld from your paycheck: This is optional; you can specify any additional amount of money you want withheld.

When both spouses work and have taxes withheld at the married rate, they sometimes end up with insufficient taxes withheld. If this happens to you, remember that you can always choose to withhold at the single rate. In addition, you can determine the proper withholding amount by completing Form W-4’s two-earner/two-job worksheet.

Claim the Correct Number of Allowances

To understand Form W-4, you must understand allowances. Think of allowances as cash in your pocket at the time that you receive your paycheck. The more allowances you claim, the less taxes are taken from your paycheck (and the more cash ends up in your pocket on payday). For example, you can maximize the amount withheld from your paycheck to ensure that you have enough tax withheld to cover your tax liability by claiming zero allowances. This will reduce the amount of cash you take home in your paycheck. The following factors determine your number of allowances:

• The number of jobs that you work
• The deductions, adjustments to income, and credits that you expect to take during the year
• Your filing status
• Whether your spouse works

To claim the correct number of allowances, you should complete Form W-4’s worksheets. These include a personal allowances worksheet, a deductions and adjustments worksheet, and a two-earner/two-job worksheet. IRS Publication 505 (Tax Withholding and Estimated Tax) explains these worksheets.

See how your withholding affects your refund, take-home pay or tax due using this tool from the IRS.

Check your Withholding

To avoid surprises at tax time, it’s a good idea to periodically check your withholding. If you accurately complete all Form W-4 worksheets and don’t have significant non-wage income (e.g., interest and dividends), it’s likely that your employer will withhold an amount close to the tax you’ll owe on your return. But in the following cases, accurate completion of the Form W-4 worksheets alone won’t guarantee that you’ll have the correct amount of tax withheld:

• When you’re married and both spouses work, or if either of you start or stop working;
• When you or your spouse are working more than one job;
• When you have significant non-wage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income, or the amount of your nonwage income changes;
• When you’ll owe other taxes on your return, such as self-employment tax or household employment tax;
• When you have a lifestyle change (e.g., marriage, divorce, birth or adoption of a child, new home, retirement) that affects the tax deductions or credits you may claim; and/or
• When there are tax law changes that affect the amount of tax you’ll owe.

In these cases, IRS Publication 505 can help you compare the total tax that you’ll withhold for the year with the tax that you expect to owe on your return. It can also help you determine any additional amount you may need to withhold from each paycheck to avoid owing taxes when you file your return. Alternatively, it may help you identify if you’re having too much tax withheld. If you find that you need to make changes to your withholding, you can do so at any time simply by submitting a new Form W-4 to your employer.

A tax professional can help you evaluate your situation and feel free to contact us for any tax professional referrals at financialplanning@bfsg.com.

Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Congratulations! You’ve just landed a new job. Here are some important things to be aware of before you receive your first paycheck.

When will I receive my paycheck?

How often will you be paid? Typically, your payday will depend on the company you work for and which state you work in. You might be paid on a weekly, bi-weekly, bi-monthly, or monthly basis. Regardless of your employer’s pay period, expect to receive your paycheck on your employer’s set payday.

Bear in mind that state law requires your employer to pay you in a timely manner. Employers cannot pay less often than required, but they are allowed to pay more frequently.

How will I be paid?

You should expect to receive your money either by direct deposit or check. Direct deposit automatically puts your paycheck into your checking or savings account. This payment method is paperless, but you’ll still have access to a printed or electronic statement that shows information similar to what is on a physical pay stub attached to a check.

Your statement or pay stub will display important information relating to the money you’ve earned. You’ll see the date of payment, the pay period dates, how many hours you’ve worked, wages earned (both before and after taxes), and any other deductions.

Direct deposit may or may not be required by your employer, depending on which state you work in. You might find that the advantages of signing up for direct deposit, such as not having to worry about your check getting lost or stolen and accessing funds quickly, make it more favorable than receiving a physical paycheck. Think about which payment method works best for you and helps you the most in managing your money.

What does the information on my pay stub mean?

Whether you opt for a check or direct deposit, you’ll receive a summary of tax information each pay period. You might be tempted to ignore this information, but you should understand what it means and why it’s important.

The following terms and acronyms commonly appear on pay stubs. If you know what the abbreviations stand for, you’ll have an easier time decoding your statement.

Gross Pay — The amount of money you’ve earned during a given pay period before deductions and taxes.

Net Pay — Your total income after deductions and taxes are taken into account.

Year to date (YTD) — The amount of money you’ve earned since the first day of the calendar year. You may notice year-to-date information in both the deductions section and the pay section.

Federal Income Tax (FIT, FT, FWT) — Remember the W-4 form you had to fill out when you were hired by your employer? The information you provided on the W-4 is used to determine the amount that will be withheld from your paycheck for taxes. The more allowances you claim, the less money will be withheld.

State Income Tax (ST, SWT) — The amount of state income tax withheld from your paycheck, which will vary depending on where you live.

Social Security Tax (SS, SSWT) — Employers are required to withhold Social Security taxes from employees’ paychecks.

Medicare Tax (MWT, Med) — The federal government requires your employer to withhold a certain amount of your paycheck to fund Medicare.

Social Security and Medicare taxes are also known as Federal Insurance Contribution Act (FICA) taxes or payroll taxes. Your employer is required to withhold 6.2% of your gross income for Social Security taxes (up to a certain annual limit) and 1.45% for Medicare taxes. Your employer also matches these FICA taxes.

What other information might appear on my pay stub or statement?

Depending on the company and your employment status, you might notice some additional deductions appearing on your pay stub or statement.

This may include pretax and after-tax deductions. Pretax deductions (such as for medical insurance and 401(k) or 403(b) retirement plan contributions) are taken out before taxes and reduce your taxable income. After-tax deductions (such as for Roth 401(k) contributions) don’t affect your taxable income.

Contact your human resources department for further explanations of the information on your pay stub or statement. If you think there is a miscalculation on your paycheck, don’t hesitate to reach out to them.

It’s exciting to earn your first paycheck, but you should know that the information on the pay stub or online statement could be important to you as well.

Prepared by Broadridge Advisor Solutions. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.