You do not want to use the IRS like a bank account. Believe me, the money withheld from your paycheck would be better spent elsewhere – loans, payments, or a pair of shoes – than it would sitting in the digital catacombs of the Internal Revenue Service.<\/p>\n
The alternative to stockpiling tax withholdings is even worse. As many Americans come to understand when they receive notice that their refund is actually a tax deficit, you can be penalized for not withholding enough. And your deficit might be too large to cover fully, resulting in additional penalties and interest.<\/p>\n
READ: Who does the IRS trust, and are you on the list?<\/a><\/p>\n Ideally, you want to hit the sweet spot with your withholdings, so you can make wise choices with your money. The stock market would be one place where a couple thousand bucks could do a lot of good this year, or the downpayment on a mortgage. Even a savings account would earn a bit of extra revenue in the next six months.<\/p>\n Here’s how you can accurately track what you have contributed:<\/strong><\/p>\n Withheld taxes will appear on your paycheck stub. They should be divided into federal income tax, state\/local tax, and social security\/Medicare. You also might see a year-to-date section, which would tell you exactly how much you have contributed in the 2013 tax year.<\/p>\n If this figure seems incorrect, or if you were given a substantial refund last year, then you should navigate to the IRS withholding calculator<\/a> and use your pay stubs to answer the questions provided. The website will take you through a step-by-step process to help you compare your real withholdings to what you should owe by year’s end. If you are informed of a deficit or positive balance, then you can fill out a new W-4 Form<\/a> and submit it to your employer, which will partially offset your outstanding balance.<\/p>\n READ: How does the Federal Insurance Contributions Act (FICA) affect my taxes?<\/a><\/p>\n If you are self-employed, you must withhold your own income by submitting Estimated Tax Payments on a quarterly basis. This will unfortunately require more intense computations – if only because you are the bookkeeper. If you are new to withholding your own taxes, then read my article, Estimated Tax Payments – tips for managing your small business<\/a> for a brief introduction to the process. <\/p>\nFor Employees<\/h3>\n
For Self-Employed and Small Businesses<\/h3>\n