Withholding Taxes: The Cause And The Cure
At Lifeback Tax, with each new case we inherit we must dig deep how we can help. Many of our clients seek ask us to help them with withholding taxes. The answer to solving each case is to first figure out the cause, followed by the cure.
The Basics of Withholding Taxes
Taxes follow a “pay as you go” system. Individuals must immediately withhold taxes upon receiving income. For most taxpayers, withholdings will come in the form of wages from an employer. However, independent contractors and similar entities must send in Estimated Tax Payments (ETD). New employees must fill out from W-4 (Employee’s Withholding Certificate) upon hire. Form W-4 informs employers how much tax employees would like to have withheld from their pay.
Common Myth #1:
The common misconception about changing withholdings with your employer is that you have to withhold or select the same amount of exemptions on your W-4 as you would when you file a return.
The more exemptions you have on your W-4, the less tax withheld from pay i.e. (M5), which in some cases may result in balance due. It is the taxpayer’s decision to decide the number of exemptions. However, taxpayers often accumulate tax liability as a direct result of not enough withholdings from wages.
The IRS will send employers a “Lock in letter’ when employees do not withhold the correct amount of taxes. This letter sets the taxpayers/employees exemption at a set amount, and does not allow the taxpayer to change it, unless they got IRS approval.
The lock in letter is sent as a direct result to “fix” the problem that the taxpayer has not taken the initiative on their own to correct. This is valid for five years. Again once the employer receives the Lock in letter it is up to the taxpayer to seek IRS approval to change their exemptions. Taxpayers required to make ETD payments have the option to send in Quarterly or monthly payments.
With our clients we advise them to send in the payments monthly. If a taxpayer is unsure of how much to send in , they should consult with their CPA or seek help for a tax professional.
The Lifeback Cure To Withholding Taxes
The Lifeback Tax process to resolving these issues is simple and transparent. We take pride in resolving our clients’ issues quickly and efficiently.
With most taxpayers, it is just a matter of changing your withholdings via your employer using the form W-4. Other taxpayers must make their ETD payments on time. Either way, our job as tax professionals is never ending. Each year is another opportunity to assist taxpayers and educate them on how and when to pay taxes. Ultimately our job with each case is to find the Cause and then work towards a Cure.
Michelle M. is a licensed Enrolled Agent and Solutions Specialist at Lifeback Tax. Her desire to help people achieve financial freedom was what initially led her towards the tax resolution industry. Michelle’s creativity and ability to think outside of the box is what allows her to create exceptional resolutions for her clients. In her free time, Michelle enjoys reading and expressing her creativity through faux gardening! To get in contact with Michelle and the Lifeback team, call (855) 605-1500 or email us at [email protected]