I have claimed 9 federal withholdings for the entire year and just switched back to claiming 0 August 1st as I should have done from the beginning of the year.
I do not want to owe taxes so I have opted to have an additional amount withheld from my paychecks. Will this work out the same if I compute the right amount to additionally hold each pay?
When trying to determine if enough money has been withheld via paycheck or by quarterly payments you need to make sure that either you have pre-calculated the amount you expect to pay, or you have calculated the safe-harbor number. Pre-calculation is hard. Congress has been in the habit of making tax law changes wither late in the year, or even yearly the following year.
The easier goal is to make the safe harbor. For most people/couples the goal is to have 100% of last years taxes withheld. That means you have to know how much were your 2018 taxes. That number isn't what you paid with your return, or how much was refunded with your return. Making the safe-harbor means you won't be penalized, but you still may own a big check in the spring of 2020.
General Rule
In most cases, you must pay estimated tax for 2019 if both of the following apply.
You expect to owe at least $1,000 in tax for 2019, after subtracting your withholding and refundable credits.
You expect your withholding and refundable credits to be less than the smaller of:
a. 90% of the tax to be shown on your 2019 tax return, or
b. 100% of the tax shown on your 2018 tax return. Your 2018 tax return must cover all 12 months.
Note. The percentages in (2a) or (2b) just listed may be different if you are a farmer, fisherman, or higher income taxpayer. See Special Rules , later.
Regarding higher income:
Higher Income Taxpayers
If your AGI for 2018 was more than $150,000 ($75,000 if your filing status for 2019 is married filing a separate return), substitute 110% for 100% in (2b) under General Rule , later.
For 2018, AGI is the amount shown on Form 1040, line 7.
That means that you can change the W-4 late in the year to make that 100% or 110% level for the year. I haven't gone as extreme as you with shift from 9 to zero, but I have moved it by 3 or 4 before.
Yes.
To do that correctly however, you'd need to calculate or at least guesstimate how much you'll owe in taxes for the year (let's call it TO for Taxes Owed).
You want to know the additional withholding (AW) per pay period you'll need to get close to breaking even at tax time. This is on top of the base withholding (BW) you'll get deducted even without any exemptions, and in addition to the year-to-date withholding (YTDW) you've already had. There's also the remaining pay periods in the year from now on (RPP).
AW = ( TO - YTDW - ( BW * RPP ) ) / RPP
The IRS collects taxes on a pay as you earn basis, that's why there is withholding from each paycheck and quarterly estimated tax payments for the self-employed.
Yes, you can work the math out to come out even by the end of the year and likely avoid any issues with the IRS. However, this could look to the IRS like a tax avoidance scheme (paying later is paying less due to the time value of money). If you had no reason to claim 9 allowances there is the potential for penalties (this is unrelated to underpayment penalties which you'd have avoided if you adjusted properly).
From IRS Publication 505:
Penalties You may have to pay a penalty of $500 if both of the following apply.
- You make statements or claim withholding allowances on your Form W-4 that reduce the amount of tax withheld.
- You have no reasonable basis for those statements or allowances at the time you prepare your Form W-4.
There also is a criminal penalty for willfully supplying false or fraudulent information on your Form W-4 or for willfully failing to supply information that would increase the amount withheld. The penalty upon conviction can be either a fine of up to $1,000 or imprisonment for up to 1 year, or both.
These penalties will apply if you deliberately and knowingly falsify your Form W-4 in an attempt to reduce or eliminate the proper withholding of taxes. A simple error or an honest mistake won’t result in one of these penalties. For example, a person who has tried to figure the number of withholding allowances correctly, but claims seven when the proper number is six, won’t be charged a Form W-4 penalty.
I imagine the IRS rarely pursues these cases, especially if it's just one year and you correct the situation to come out even. The notion that you can put whatever you want on the W-4 does not seem accurate.
