Paycheck Chronicles

Check Your Income Tax Withholding


This time of year, I like to check my income tax withholding and see if I am on track to have approximately the right amount taken out by the end of the year.  Not sure what I mean by withholding?  You can learn more about it at What Is Income Tax Withholding and Why You Want To Get It Right.  Once you understand the basics, you'll see why I do what I do.  This is especially important for anyone who has self-employment income because self-employed people are supposed to file quarterly estimated taxes.  If you haven't, and you haven't had enough pay withheld from traditional jobs, you might be subject to some penalties.  Even if you aren't self- employed, there is no reason to have a huge refund or a huge tax bill if you have managed your withholding properly.

How To Calculate Your Estimated Income Tax Liability and Payments

Not sure what to do?  First, go to and print out a copy of whichever tax return you intend to file:  1040EZ, 1040A, or the regular old 1040.  Then, pull up the military member's most recent Leave and Earnings Statement (LES) and find the paycheck stubs for any other employment.  You may also want to pull out your 2011 tax return for reference.

Quickly add up all the income you already have for the year, plus estimate how much more income you'll have for the rest of the year, and put it on the income line..  (Line 7 for 1040 filers, line 7 for 1040A filers, and line 1 for 1040EZ filers.)  Note how much you've already had withheld in federal taxes for the year, plus estimate how much more will be withheld for the rest of the year.  Enter this information on the federal income tax withheld line.  (Line 62 for 1040 filers, line 36 for 1040A filers, line 7 for 1040EZ filers.)

If you are using a September LES for this, and you aren't anticipating any changes for the rest of the year, some numbers there make it pretty easy to calculate these figures.  First, find the section marked FED TAXES.  It is on the top line of the summary section, on the right hand side.  There you will see WAGE PERIOD, WAGE YTD, AND TAX YTD.  WAGE PERIOD is the amount of taxable income for that pay period/month.  It should be the amount of any taxable pays (base pay, special pay, or bonuses) pay minus any amount put into the Thrift Savings Plan (TSP.)  YTD stands for Year To Date, so WAGE YTD is the amount of taxable pays you've had for the entire year minus the total amount contributed to TSP for the year.  TAX YTD is how much you've had withheld in federal taxes so far this year.  You'll also need the first line in your Deductions section, Federal Taxes, which shows the amount deducted for this one month.

In order to calculate your estimated total wages for the year, take the WAGE PERIOD amount and multiply it by three, for the three months remaining in the year.  Then add that number to the Wage YTD amount to get the total estimated wages for the year.  (Military service only, of course.)  You can calculate how much you'll have withheld by the same method, using three times the Federal Taxes amount plus the TAX YTD amount.

Enter your estimated total wages for the year, then fill in any other lines that apply to you.  This is where you use last year's return for reference.  If nothing has changed, then you should be filling out the same lines this year.

Once you get to the end, see how things are going.  If you are expecting a large refund or it looks like you are going to owe a large amount, you can change your withholding for the rest of the year.

Self-Employed Folks, It Gets Even More Complicated

As I said, this is particularly important if you are self-employed.  Self-employed folks, or anyone with income reported on a Form 1099, are supposed to file quarterly estimated income payments four times per year.  This is basically a simpler version of the regularly withholding that occurs for wage earners.  There are all sorts of complicated and detailed instructions in IRS Publication 505.  The short version is that if you expect to make more than $1,000 in self-employment earnings, then you are probably supposed to file quarterly estimated income payments.

However, if you have multiple sources of income, including some wage income, you may find that the income taxes withheld on the wage income are enough to cover the tax liability for the self-employment income.   For many, it is easier to deal with the withholding on the wage income than to file quarterly estimated taxes.  However, if you don't have enough withheld to cover the entire tax liability, you might be subject to penalties and/or interest.

How much is enough?  You are basically trying to establish that you made a good-faith effort to pay appropriately.  You can accomplish this by either withholding enough to cover your entire tax bill, or withholding 100% of your entire tax bill for the prior year, or 90% of your actual tax bill for this year.  For me, it is easiest to calculate it from last year's tax bill.  Keep in mind, by tax bill, I do not mean the amount that you owed in April.  I mean the entire tax bill, before credits, for which you were responsible for the previous year.

If all of this is mumbo-jumbo to you, then you need to consider your situation before you decide whether or not to seek professional assistance.  I'm neither an accountant or a lawyer, but I learn this so that I can deal with my own taxes.  I'm not always right.  Use what you've read here to decide whether you need to seek additional help from a professional.

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