by Eva Rosenberg, MBA, EA a.k.a. TaxMama


Once upon a time, a tax professional was asked by NAEA's The Enrolled Agent  to write an article about how to do the proper computations to determine what  exemption and dependent amounts should go on an employee's W-4. After writing  over 25 pages on the subject, his wonderful, clever assistant was able to cut it  down to a mere 10 pages.

Who can follow that, much less read it?! But, his analysis is a good indication of how complicated it can seem if your clients try to follow the IRS's instructions for completing the W-4 Form.

TaxMama's way is much easier.

First of all, you have to help your clients determine their tax payment strategies - there are basically only two concerns:

1) Advise them to pay in enough to avoid the underpayment penalty, or
2) Pay in enough so that they don't owe anything next April.

Under the first strategy, while they won't be facing any IRS penalties, if your clients' incomes increase substantially this year, they will be faced with a very high balance due. So, strategy #1 will include them being responsible enough to put the rest of the taxes due into some safe savings account or money market account. (This is not money they want to put at risk - unless they have really good nerves.) Frankly, strategy #1 is my preferred method. 

Second, determine how much tax your clients must pay.

1) Under strategy #1, it's simple - 110% of last year's total tax liability.
2) Under strategy #2, you'll need to help them do projections of what they
expect to earn from all sources - wages, business, stocks, savings,
unemployment, investments, taxable winnings, whatever...get out your crystal
ball. )


Third - figure out how many payments they'll be making - in other words, how many payroll periods do they have left, AFTER they have notified their payroll departments about their decisions - by filing the new W-4. (e.g they are being paid every other week. That means there are 26 payroll periods in the year. How many are still left today?) Make sure your clients pose these questions to themselves and assist them in making the necessary calculations.

Fourth, start the computation:

The method is the same for both strategies, now - and it works for your clients' state taxes as well. Start with the total tax they want to pay. Let's say it's                 $10,000
Deduct their withholding up to their last paycheck
(or the last one before their new W-4 takes effect)                                   $1,350 
                                                                                                                    ----------
Get the balance:                                                                                           $8,650

Now, divide that by the number of pay periods left this year - 

let's say there are 19 left (and round up)                                        $ 456.
That means your clients should have $456.00 worth of Federal  taxes deducted  from each of their paychecks for the rest of the year.

Step Five - Look up the proper withholding tables for your clients' filing
status and payroll frequency. IRS Payroll tax Tables


For example, if a client earns $2100 per month - using S-0 (single, with no
dependents) will have them take out $431 from each paycheck. So, prepare ONLY
the bottom of the W-4 with:

His/Her name, etc. Then,
Box 3 = Single
Box 5 = 0 dependents
Box 6 $25.00 additional withholding ($431 +$25 = $456)

By the way, don't worry if your client is not single. You're just trying to
help your client get the numbers to come out right. Oh yes, and there is a way
to avoid the tables altogether.

If your clients enter 20 dependents in Box 5, and $456 in Box 6. (That will
get them -0- withholding from the tables, but will force the payroll computer
to deduct the full $456.00) The main reason I don't recommend that you advise
them to do this?

Anything over 9 dependents, their payroll office must send each of their W-4s
to the IRS. And although, once you explain your logic to IRS, they'll agree -
but, oh the pain until they do...and you're the one who must reply to all of
the correspondence -- for free.

So, you see, you don't need to engage in lots of complicated computations.
Ease your clients' anxieties by letting them know that even they can fill out
a simple, 7-line form all by themselves. And this is no fairy tale.

----

Eva Rosenberg, MBA, EA,  TaxMama.com

Affectionately known as TaxMama.com to her clients and her audience. Our TaxMama
has decades of tax and business experience, across a surprising spectrum of
industries. Combining formal training at national CPA firms with her warm,
homey style, she does her best to protect her brood from the ravages of the
U.S. Income Tax system. Her office in Southern California works specializes in
small businesses, non-filers trying to get back into the system and
Internet-based businesses across the globe.

copyright: Eva Rosenberg 2000