Getting Your Withholding Right
When you get your paycheck and look at how much in taxes has been taken out, do you wonder if you could lessen the bite some? If you answered yes, a systematic review of your withholdings may be in order.
Click on the button below for more information and examples of how adjusting your withholding can benefit you.
State Tax Withholding
If you live in a state that has a personal income tax and work only in that state claiming the same amount of withholding exemptions as your federal will generally keep you near the breakeven point. But, alas, each state has different ways and methods of calculating taxable income. click here for information on how each state arrives at taxable income.
Working in multiple states during the year presents a different set of problems for people. Allot of employers do not offer a withholding form for you to fill out for the state you are working in, and just assume zero withholding exemptions which results in the maximum tax taken from your check. You have been over withheld for the tax that will be due for that state when the return is filed. This means you will wait six months to a year or longer to get your money back. One way to alleviate this problem is to consider claiming exempt from withholding and paying an estimated tax to that state or paying the tax due when you file that states tax return. In most states if the tax due at filing is les than $1,000 there would not be an under withholding penalty. Again, refer to the link above for more information.
click here for more information and examples of "going exempt" on state withholding.
Another problem we have seen is an employer does not withhold or report the income to the state you are working in. There are several reasons for this, some legitimate, some are not. If the job is very short in duration there will not be any tax withheld or reported because it is below that states reporting level. Some others will not report and withhold because they do not want to have the "burden" of paperwork and they want to avoid paying unemployment tax on your wages to that state. We have seen this in mostly smaller and newer companies that have not yet gained many contracts or work in multiple states. The unemployment tax issue could come up later when you file an unemployment claim and no "wage credits" can be found for that period of employment. We urge that you ask your potential employer about state withholding and reporting when considering an assignment to avoid a surprise later.
Another thing to consider about state withholding - You live in a state with a personal income tax and work primarily in other states. Your home state considers all income earned as taxable, no matter where it was earned. Each state does allow a credit for tax paid to the other states. This of course means you have to file a return with the other states.
In general, the amount of credit is the lesser of the tax assessed by the other state or the amount of tax on that income that would be assessed by your state.
If you work in a state that does not have an income tax, there would not be any withholding, or credit against you home state tax return. Since all income is taxable to your home state you could submit a W-4 form for your state to your employer and have tax withheld for that income. This could prevent an unpleasant surprise when it comes time to file your state tax return. If your employer cannot or refuses to accept a W4 for your home state we suggest estimated taxes be calculated and paid if needed to prevent any under withholding penalty your state may calculate if you were to end up owing tax when the return is filed. Estimated payments to your home state is recommended when a significant amount of income is earned in a state without a tax.
Taxes can be a complicated and confusing subject, but the goal of Kiwi Tax Service is that you not pay more than your legal amount of tax and not be shocked by a big tax bill when it is time to file your returns.
If we can be of assistance or answer any questions do not hesitate to contact us.
