Paying the Right Amount of Taxes

Take a look at your paystub and you realize the amount of taxes that are being withheld from your pay.  It can be disheartening, but that is the way we pay our taxes if we are employed.  If you don’t get a paycheck with withholdings, then you may be required to make estimated payments throughout the year.  Why can’t we hold on to our money until the payment is due?

Well, in the US, our income taxes are basically on a pay-as-you-go method.  We are expected to pay as we receive the income.

But, what happens when there are not enough taxes paid on your account throughout the year?  Well, you could be subject to penalties and/or interest for failure to pay or underpayment.  Paying even more is harder yet. 

So, what can you do to ensure that enough taxes are being paid to avoid any interest and/or penalties?

First of all, if you are a W-2 employee, make certain that your employer is withholding sufficient taxes.  If you want to do an analysis, go to IRS.gov and access the Tax Withholding Estimator.  With the entry of certain information, you can be provided with guidance on the amount of taxes that you should be having withheld.  Your employer’s payroll individual can also further assist you.

If you are not a W-2 employee, then you are most likely (or should be) making estimated payments to cover your tax liability.  If you underpay or fail to pay, you can be subject to penalties and/or interest as well.  The amount to be paid is usually based on your prior year’s tax liability.

While we all like to receive a refund, your refund is non-interest bearing.  Careful consideration should be given to having the proper amount of taxes withheld so that you are not having excess withholdings or if you are making the appropriate estimated payments.  On the flip side, you want to make certain that you are having sufficient withholdings or making sufficient estimated payments so that you avoid penalties and/or interest for underpayment.  Why pay additional amounts in the way of interest or penalties that you otherwise wouldn’t have to pay?

Keep in mind that if you have life-changing events – birth of a child, adoption, marriage, death of a spouse or dependent child – you may require a re-evaluation of your withholdings long before you realize the impact when filing your income tax returns in the first quarter of the year.

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About the Author

Kay Sowa is a paralegal in the Trusts and Estates Group at Capehart & Scatchard, P.A. She is an IRS Enrolled Agent, an Accredited Estate Planner®, and a Certified Trust and Fiduciary Advisor. She oversees the trust and estate administration practice for the firm. She is an accomplished author and lecturer who has frequently spoken on behalf of a number of organizations including the National Business Institute and the Institute of Paralegal Education.

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