03 Dec I got a raise. How should I change my tax withholding?
Q. I got a $20,000 raise and promotion in late October, and I never adjusted my withholding. How can I decide if I need to change that and when should I?
— Working hard
A. First, congrats on your raise.
Trying to decide how to handle changing income is a common issue but the answer will rest on the specifics of your situation.
Generally, the answer will depend on how you completed your federal and state Form W-4, said Atiq Ahmed, an Enrolled Agent and owner of Edison Tax Group in Edison.
He said every employee must complete this form before starting their employment.
“You write your exemptions, meaning the dependents you will claim on your federal and state personal income tax return,” he said.
For example, a single person typically would enter one exemption for themselves while a married couple would enter two exemptions and any additional dependent would be another exemption, he said.
“Based on the exemption, the employer knows how much tax should be withheld on your wages,” Ahmed said.
The more exemptions you claim the lower your tax withholding will be, he said.
You can also enter a zero exemption. In this case, the maximum tax will be withheld on your wages, he said.
“This can be good or bad depending on your income, so it is crucial to correctly complete your W-4,” Ahmed said. “Otherwise, you can end up with a large tax liability when filing your personal income tax return. Depending on the tax liability, you can also end up being assessed with an underpayment penalty by the IRS and state.”
Another and more accurate way to ensure sufficient income taxes have been withheld is to run a year-end tax estimate for the fourth quarter.
If you haven’t paid enough, you can always make a fourth quarter tax payment, which is due on January 15, he said.
“This will prevent you from having to make a large tax payment by the due date — April 15 — and from penalties being assessed,” he said.
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This story was originally published on Dec. 3, 2021.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.