A friend recently texted an off-the-record tax question that he had about his paycheck. He said his co-workers like to “go exempt” and “not pay taxes” for the last 3 months of the year. Paraphrased, his question essentially was:
“If I choose to go exempt, should it only be for those months?”
After some clarification, I laid out my answer to him like this:
- By “going exempt”, he was referring to employees not having a withholding. Using, Form W-4, he may elect to adjust his withholding and therefore how much is withheld from his paycheck for federal income tax. It doesn’t stop other taxes like social security, unemployment, and other state taxes. He can request to adjust withholding as needed throughout the year, but the processing time may depend on the company’s policy. He may not see it take effect until after a few paychecks are processed.
- People commonly opting for the last 3 months of the year may have to do with the holidays. By “going exempt” for the last 3 months, they can squeeze out some extra dollars to help pay for gifts and other things for the year’s end.
- Of course, “going exempt” means that it will affect his tax filing and what he may or may not owe. He stated he usually has a refund, but depending on his tax situation, he may end up having to pay when he files by next April if he goes exempt.
Withhold on no withholding?
While it may be tempting to not have a withholding and get that extra money right away, you are still on the hook for whatever income tax you owe when you file the following year.
For example, assuming income remains the same, instead of having a withholding of $200 from each paycheck for a year, you opt to go “exempt from withholding” for the year. The tax you owe at the end of the year will remain the same at $3000, but rather than having that $200 withholding taken out each paycheck to help pay that tax ($200 x 12 = $2400 already paid for taxes), you are now on the hook for that entire $3000 when you file rather than just $600 if you had a withholding. Depending on your spending habits, having to pay $3000 in its entirety to avoid any penalties & interest may not be a very appealing situation. Ideally, the best withholding is one that takes “just enough” of your income that it pays your tax obligation.
Finding the right withholdings for employees is another part in the engine of an emerging business. Employers can boost their business engine with the right accounting support to provide insight and keep their books in proper order. Look no further than us here at MiklosCPA. We help many emerging businesses in assorted industries with their accounting and tax needs through our “virtual office” services. If you wish to learn more how we can help your business, reach out to us. Also, follow our social media sites for future “good to know” articles and other accounting tidbits.