Tax witholding

[propita]

Thanks for your posts, PKTrekGirl.

Hubby and I routinely overpay during the year. He has a full-time job and does per-diem here and there. Those places usually don’t take taxes, or really insufficient. And he teaches two nights/week, so there’s another income source where tax withholding is insufficient.

We’ve had years where we paid $4000, and years where we’ve gotten back over $5000. It all depends on whether the employer withheld sufficiently. Being financially conservative, we cover our asses, assume the worst, and prefer to have too much taken out. Big refunds (~$5000) go to IRA accounts, so we get to do that without a hit on our daily budget.

Did I mention we’re totally anal, financially, that is?

 

[Alidar Jarok]

I was going to speculate you'd probably have to pay a penalty, but it appears PKTrekGirl is far more knowledgeable and explained this all in a much better way.

If you think you're going to get a refund, you might be able to tweak the amount being withheld, but you still want to make payments every quarter.

 

[farmkid]

For most people, witholding is good because it saves them from having to come up with a large check at the end of the year. Most people just aren't disciplined enough to save up the money.

The problem I have with it is related. Because taxes are taken out before people ever see their money, most people don't have a real sense of how much they are paying in taxes. If people actually got that money in their hands and then had to pay it, I think people wouldn't be as willing to let the government waste so much money and/or establish huge expensive programs of dubious worth. They would pay more attention to what the government is doing and would be more motivated to get informed on political issues.

 

[PKTrekGirl]

That depends entirely on how honest you want to be with the government.

It's basically up to you to track and claim your income. Different places do different things. For example, with the computers we have at work, I can claim absolutely nothing if I choose to. Other places will at least make you claim your credit card tips, as they can be tracked. It's really all up to the individual. That said, the less I claim, the bigger my paychecks are. If I claim too much, I sometimes don't get a paycheck at all.

I am actually going to be starting a new, "real" just next week, and it will be interesting (and scary!) to see how much money I will actually be making now that taxes will be taken out of everything.

Bartending is about the most notoriously under-reported income on the planet. But from everything I can tell, you can make really good money at it. Alot more if you really dishonest.

I have at least one friend who I was laid off with from IBM who is now going to bartending school. She can't find a job in her field...so she is going to try bartending. I'm watching this experiment closely!

 

[RoJoHen]

Bartending is about the most notoriously under-reported income on the planet. But from everything I can tell, you can make really good money at it. Alot more if you really dishonest.

Absolutely.

 

[Lindley]

There's no question I can save money. I don't have a problem with that. And my tax withholding is nontrivial-----between federal, social security, state, etc, we're talking over $25,000 per year. If I put that in a Rewards Checking account with 4% APY on balances up to 25k and refilled the portion used fulfilling the minimum obligations of the account as necessary, that would net me an extra $1000 per year.

I am very curious about the penalties and interest PKTekGirl mentioned. It sounds to me like they're penalizing you for not paying taxes before the due date, which seems a bit odd.

 

[Small White Car]

To others, it means crappin' it away on impulse purchases and a billion different things you'll have no recollection of later.

So yeah, I like to let the government hold onto my money all year. They do a better job saving it than I would have.

My refund is always quite large and I'm fine with that. Sure, I could earn a few bucks investing, but whatever. I'd much rather just NOT SPEND the frick'n money. When the government has it, that's what happens.

 

[Trekker4747]

I claim zero and I got about a $1000 federal overpayment refund as well as a $200 state overpayment refund this year, I "suppose" I could adjust my taxes so that I pay less taxes, get bigger checks and a smaller refund but it's nice having that large infusion of cash every January.

 

[Snaploud]

Quarterly payments are a legal requirement for everybody in the U.S. (with a few exceptions regarding very low self-employment income or the very first year of self-employment income). It must either happen via withholding or via quarterly filing. You really don't have a choice in the matter (unless you want to run afoul of the law).

Withholding is a very effective method of preventing individuals from avoiding paying their taxes. It also allows the government to have a better sense of changing tax revenues. In other words, it's really not about you. It's about what is considered most efficient for the government.

 

[PKTrekGirl]

Thanks for your posts, PKTrekGirl.

Hubby and I routinely overpay during the year. He has a full-time job and does per-diem here and there. Those places usually don’t take taxes, or really insufficient. And he teaches two nights/week, so there’s another income source where tax withholding is insufficient.

We’ve had years where we paid $4000, and years where we’ve gotten back over $5000. It all depends on whether the employer withheld sufficiently. Being financially conservative, we cover our asses, assume the worst, and prefer to have too much taken out. Big refunds (~$5000) go to IRA accounts, so we get to do that without a hit on our daily budget.

Did I mention we’re totally anal, financially, that is?

Well, the employer withholds what you tell him to withhold when you are a W-2 employee. So it's really not up to him to make sure it's sufficient in that case. It's up to you guys to figure out how many exemptions you want to claim - that is how you tweak what you pay in. Which in turn, impacts what you get in a refund.

Interesting that your situation has swung so widely from writing big checks to the IRS to getting back big checks from them. However, if your employers and pay rates stayed the same (or roughly the same - no massive bonuses that you didn't have withholding taken out on, for example) and you claimed the same number of exemptions on your W-4s each year, something else must have been affecting it. Perhaps you have a mortgage with an adjustable interest rate or something? Or sold some stock? Or had another part time job for a while that you didn't have much taken out on (like maybe much more per diem work than usual from someone who does not take out tax and sends you a 1099? Could be any number of things....but all things being equal, it shouldn't be swinging that wildly.

Very interesting.

 

[PKTrekGirl]

There's no question I can save money. I don't have a problem with that. And my tax withholding is nontrivial-----between federal, social security, state, etc, we're talking over $25,000 per year. If I put that in a Rewards Checking account with 4% APY on balances up to 25k and refilled the portion used fulfilling the minimum obligations of the account as necessary, that would net me an extra $1000 per year.

Okay. But don't say I didn't warn you.

I am very curious about the penalties and interest PKTekGirl mentioned. It sounds to me like they're penalizing you for not paying taxes before the due date, which seems a bit odd.

It's not a 'bit odd'. The US has a 'pay as you go' system, for the most part. That is sort of the whole POINT of withholding and estimated tax payments. April 15 is only the final 'settle up' date - NOT the date when you go from 0 to whatever it is you owe for the year.

Here is the form you will need to fill out should you decide to pursue this extremely ill-advised course of action:

http://www.irs.gov/pub/irs-pdf/f2210.pdf

You will also need the instructions to calculate your impending penalty, which will be payable along with your entire tax bill for the year:
http://www.irs.gov/instructions/i2210/index.html

Also, keep in mind that interest is also charged on your outstanding unpaid balance through the year and into subsequent tax periods until you are settled up in full (similar to a credit card). This interest cannot be calculated and sent in with your return - the IRS calculates it for you and sends you a BIG WHOPPING BILL, thus initiating what will likely become an 'ongoing close personal relationship' with them. They are loads of fun to correspond with, however. It will give you something to do while in federal lockup, in between worrying about what will happen to all of your assets they seized.

Well, okay. That last sentence was an exaggeration. But the BIG WHOPPING BILL part and the 'ongoing close personal relationship' part are both true. Unless, of course, you do not pay the BIG WHOPPING BILL. In which case, that last sentence is not an exaggeration and you will have to hire a tax attorney at about a gazillion dollars an hour to get you out of the pokey and get your bank accounts unfrozen.

Oh...and don't forget to double the hassle involved with all of the above, because your state will want to get in on the action also.

 

[RJDiogenes]

At my old job, I routinely got about $2000 back between the State and the Feds. So, with my new job, I was expecting at least a thousand. Unfortunately, some genius in HR decided I had a wife and kid and gave me deductions accordingly, so I ended up owing a thousand, which put my estimated budget off by two thousand. Then I had to correct my deductions, of course, so I had to compensate for this shortfall while taking home less money every week.

Luckily, I got audited and they ended up owing me $500, which helped a bit.

 

[Yoda]

Most people are too stupid to handle their basic finances. Yes, people should leave things be, and pay in a little bit more than they'll owe in the end. Many people will take any bit of money they have and spend it as foolishly as possible. Anyone with half a brain can understand that if you don't have the money withheld, you will have to pay it at a later date. But half a brain is a tough hurdle to jump.

If you understand what you're doing, and not fucking yourself over financially, do what you want. But if you think people should 'keep their money' as a general rule, you're insane.

 

[Lindley]

There's no question I can save money. I don't have a problem with that. And my tax withholding is nontrivial-----between federal, social security, state, etc, we're talking over $25,000 per year. If I put that in a Rewards Checking account with 4% APY on balances up to 25k and refilled the portion used fulfilling the minimum obligations of the account as necessary, that would net me an extra $1000 per year.

Okay. But don't say I didn't warn you.

I am very curious about the penalties and interest PKTekGirl mentioned. It sounds to me like they're penalizing you for not paying taxes before the due date, which seems a bit odd.

It's not a 'bit odd'. The US has a 'pay as you go' system, for the most part. That is sort of the whole POINT of withholding and estimated tax payments. April 15 is only the final 'settle up' date - NOT the date when you go from 0 to whatever it is you owe for the year.

Okay----so what if I make the appropriate estimated tax payments, then? I usually make estimated payments anyway, so that's nothing new, it would just be for a larger amount.

 

[PKTrekGirl]

There's no question I can save money. I don't have a problem with that. And my tax withholding is nontrivial-----between federal, social security, state, etc, we're talking over $25,000 per year. If I put that in a Rewards Checking account with 4% APY on balances up to 25k and refilled the portion used fulfilling the minimum obligations of the account as necessary, that would net me an extra $1000 per year.

Okay. But don't say I didn't warn you.

I am very curious about the penalties and interest PKTekGirl mentioned. It sounds to me like they're penalizing you for not paying taxes before the due date, which seems a bit odd.

It's not a 'bit odd'. The US has a 'pay as you go' system, for the most part. That is sort of the whole POINT of withholding and estimated tax payments. April 15 is only the final 'settle up' date - NOT the date when you go from 0 to whatever it is you owe for the year.

Okay----so what if I make the appropriate estimated tax payments, then? I usually make estimated payments anyway, so that's nothing new, it would just be for a larger amount.

You mean INSTEAD of withholding? Why would you want to do that?

Most people would actually increase their withholding so that they DON'T have to make any estimated tax payments...which are generally a pain in the ass (remember, you'll have to pay both the federal and the state quarterly, plus settling up at the end of the year). If you forget and are late with a payment, for example, you could find yourself in an interest & penalty situation. Plus, making estimated tax payments increases the number of forms you have to fill out and include in your federal and tax returns...and if you get your taxes done by someone (which I would recommend in this case) the tax prep bill will be higher, again, impacting any 'savings' you generate from this little scheme. You will also likely need help in checking to make sure you are paying in enough each quarter....or you might end up with interest and penalties that way...or a BIG WHOPPING BILL to pay on April 15. Or both.

Seriously, Lindley, there are WAY easier ways to save money than fucking around with the IRS. However, since you seem determined to do so, I'll just let you go on with your 'plan' here - ill-advised as it is.

I don't understand it - putting yourself in harms way, just to save a few measly bucks (because that is all it will come to - IF you do everything correctly, which you likely won't, in which case, getting yourself out of trouble will cost you thousands). But hey...you wanna play Russian Roulette with the IRS without knowing what the fuck you are doing (which, from the very first post of this thread, it was abundantly obvious to me that you don't), then have at it.

But let me be clear here: stopping your withholding completely (and keep in mind here, this is ONLY your withholding - they will still take out social security, unemployment taxes, etc - you can't stop that part) and instead making estimated tax payments is one of the stupidest tax planning ideas I have seen in a very long time. I would never in a million years allow a client of mine to proceed with such a hair-brained scheme.

 

[RoJoHen]

I have a friend who pays estimated quarterly taxes, and he still ends up owing the IRS a lot of money every year. AND he's a Financial Advisor, so I don't really know what he's doing.

 

[PKTrekGirl]

I have a friend who pays estimated quarterly taxes, and he still ends up owing the IRS a lot of money every year. AND he's a Financial Advisor, so I don't really know what he's doing.

Humm...well, I don't know what you mean by 'alot of money'.

But if he is not keeping himself in the safe harbor by paying in during the year the equivalent of 100% of his prior year tax liability or 90% of his current year's tax liability (which of course is very difficult to calculate unless you have a crystal ball, so those of us who do tax planning usually just go with 100% of prior year liability to be safe), then he is not a very good financial advisor.

 

[Lindley]

Seriously, Lindley, there are WAY easier ways to save money than fucking around with the IRS. However, since you seem determined to do so, I'll just let you go on with your 'plan' here - ill-advised as it is.

I'm not planning anything yet. I'm gathering information.

 

[RoJoHen]

I have a friend who pays estimated quarterly taxes, and he still ends up owing the IRS a lot of money every year. AND he's a Financial Advisor, so I don't really know what he's doing.

Humm...well, I don't know what you mean by 'alot of money'.

But if he is not keeping himself in the safe harbor by paying in during the year the equivalent of 100% of his prior year tax liability or 90% of his current year's tax liability (which of course is very difficult to calculate unless you have a crystal ball, so those of us who do tax planning usually just go with 100% of prior year liability to be safe), then he is not a very good financial advisor.

By a lot, I mean several thousand dollars.

I think he's actually pretty good with other people's money. He doesn't really handle their taxes so much as he deals with IRAs and other investments.

 

[Cher]

Good stuff PKTrekGirl. You've reminded me of the good ole' days of estimated tax payments and safe harbor rules that we used to mull over with our clients. Remember that asshole at SEIS who wrote a letter claiming he didn't owe any taxes by some obscure tax law or something? I remember we laughed at him good.