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Show The Bottom Line Watch those withholdings By KENNETH J. ROSE Business Counselor General Business Services Bountiful The concept of payroll tax withholdings with-holdings has almost become a common com-mon fixture in the American Society. Socie-ty. When tax with-holdings became be-came part of the income tax laws the idea was to make paying taxes as painless as possible. If a little is taken out from each pay period, you hardly miss it, right? The only catch is that it is still the taxpayer's responsibility to pay the correct amount of taxes and do it on time. HOWEVER, IT is extremely rare to pay exactly the right amount in taxes. The most common com-mon outcome is either to owe additional addi-tional taxes, or to get a refund. The size of the refund or the amount owed is the critical thing to examine ex-amine and should be just as important impor-tant as filing the tax return. If the difference between the tax liability and the taxes prepaid is small everything ev-erything works out fine. A large difference can change the entire picture though. If you end up owing a large amount in additional taxes you could also be subject to late payment penalties and interest. A large refund means that you are loaning the government govern-ment your money interest-free. THE WAY to control the amount of prepaid taxes is through W-4 exemptions ex-emptions if you are on a payroll and through estimated taxes if you are self-employed. Now the interesting interest-ing quirk about the W-4 withholdings withhold-ings is that you can change them as often as you want. What that means is that you could set your exemptions high in the early part of the year so withholdings are lower. Then in the later part of the year the exemptions can be lowered so more is withheld in order to cover the antcipated tax liability. Since the IRS treats any withholdings with-holdings reported on the W-2 as though they had been paid evenly throughout the year, the taxpayer can also avoid the underpayment penalties which are calculated by looking at the taxes paid on a quarterly quar-terly basis. THE KEY to using this technique techni-que is proper and regular tax planning. plan-ning. At the very least, if you are getting a large refund you should increase your exemptions. You are not limited to the number of personal per-sonal exemptions that you can claim on your tax return. If you need help you should consult your business counselor or tax advisor. |