Tax Tips: How do I correct my withholding?
Why do you want to correct the withholding? Well if you owed a lot of money, the answer is obvious. It's much less painful to have the government take the taxes out of your check little by little, than to have to write a large check in March or April.
If you get a big refund, you'll also want to correct your withholding. If you got a big refund, it means the government was taking too much money out of each paycheck, and they got to use your money all year without paying you any interest. You should lower your withholding amount to keep more of your money throughout the year. You could put that money to work for you all year long, earning some interest or paying down some debt.
How do you correct your withholding so that you have more or less withheld next year? Ask your employer for a new W-4 form, and at the same time, ask your employer how many allowances you have been claiming. If you need more withheld from your paycheck, claim fewer allowances than you did last year. If you need less withheld from your paycheck, claim more allowances than you did last year. Have someone from the payroll department or your tax preparation service help you, if necessary
Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.