Yesterday, we talked about why a taxpayer might want to change their W4s to have less taken out. Today, we’ll cover why you might find yourself in the opposite situation–choosing to ask the government to take out more money next year. That last sentence probably left many of you about ready to call me crazy, but there are some times when this makes sense. Despite the economic downturn, for instance, some people made more last year than they did in 2007.
When tax time rolled around, these people found themselves in an irksome situation–they had to write the IRS a big check. To prevent such financial irritation the next year, such taxpayers should adjust their w4s to reflect their new income.
New freelancers often find themselves in a new, confusing world of actually owing taxes. Since freelance work is usually done according to a contract, payroll taxes are not taken out. This means that the freelancer has to pay all of those federal taxes him or herself. One accounting rule of thumb holds that freelancers should save about a quarter of their income for taxes. Those who meld freelance work and traditional employment may choose to ask their traditional employers to withhold more, to save up for that big tax burden from freelancing.
Tomorrow, in the final part of this series, we’ll talk about other times when taxpayers should check and probably change their W4s.
