How many allowances should I be taking on my W4 tax form? Right now I am taking two but I don't know why. I think HR set it that way. In previous years I've always had to pay in to federal taxes but never more than $1000.
This year I earned about $10,000 in extra income and it looks like I am going to owe about $3500 in federal taxes plus a penalty.
The maximum amount of taxes are withheld from each paycheck.
You’ll most likely get a refund back at tax time.
Claim zero allowances if someone else claims you as a dependent on their tax return. (For example – you’re a college student and your parents claim you.)
Claiming 1 Allowance:
This is a good option if you’re single and only have one job.
You’ll most likely get a refund back.
Claiming 2 Allowances:
If you’re single and have one job, claiming two allowances is also an option.
You may get closer to your exact tax liability (aka: break-even), but you need to be careful because this could still result in some tax due.
If you have more than one job and are single, you can either split your allowances (claim 1 at Job A and 1 at Job B), or you can claim them all at one job (claim 2 at Job A and 0 at Job B).
If you’re married, you can claim two allowances – one for you and one for your spouse.
If you and your spouse expect to file a joint return and you’re both employed, you will only complete one set of W-4 forms. Add your combined income, adjustments, deductions, exemptions and credits to figure your withholding allowances. You can divide your total allowances whichever way you prefer, but you can’t claim an allowance that your spouse claims too.
If you’re married filing separate returns, use separate W-4 worksheets and figure your allowances based on your own individual income, adjustments, etc.
Make sure you calculate your allowances based on the new tax rules, not the old ones. Would you have owed taxes for '17 based on '18's rules?
I'm not sure how you owe so much more. Was the $10K a raise or bonus? Then the taxes should have come out of your paycheck. Was it a new business and you didn't pay any estimated taxes? Did you reach an income level where you were phased out of certain tax credits? It's hard to answer without knowing the specifics, if that's possible.
If you made something like consultant income that turned out to be much higher than expected, you usually don't get penalized if you paid what you paid the previous year in taxes. You still owe the tax but not the penalty.
This year I earned about $10,000 in extra income and it looks like I am going to owe about $3500 in federal taxes plus a penalty
Might not need to pay the penalty, depending on your situation:
Generally, most taxpayers will avoid this penalty ... if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.
I'm not sure how you owe so much more. Was the $10K a raise or bonus? Then the taxes should have come out of your paycheck. Was it a new business and you didn't pay any estimated taxes? Did you reach an income level where you were phased out of certain tax credits? It's hard to answer without knowing the specifics, if that's possible.
The extra income was from a contract job so there were no taxes taken out of it. It turns out for income like this I have to pay not only my marginal tax rate of 25% but also another ~15% due to the self employment tax. Self employment tax covers social security and medicare.
Thanks! Based on the form and some research I set my allowances to 1 rather than 2. This should prevent me from owing too much in taxes next year unless I get a lot of extra income again, in which case I will pay taxes as needed to not get behind on it.
Might not need to pay the penalty, depending on your situation:
I ended up getting some help from a CPA through TurboTax who was able to dramatically reduce what I owed and the penalty. Another solution would have been annualizing the income using form 2210 but it seemed like more work than it was worth in this case. I tried it but I couldn't get my numbers to make sense with the sum that TurboTax.
