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I am trying to figure out what I should enter in my W4 and want to use the IRS Withholding Calculator as a guide.

To that end, my information is as follows:

  1. We will file MFJ, with an income of $85k/yr and $5k signup bonus, starting May 1st 2013
  2. I worked as a contractor from Jan 2013 to March 31st 2013 earning a total of $15k with no taxes withheld (will make my ES payments on April 15th)
  3. My wife (as well as I? (since we were both students)) can claim the Lifetime Learning credit for tuition (so $1k as an estimate for this credit should be close enough if not less)
  4. We have no other credits or deductions to make besides the standard and personal deductions

When I enter this information into the IRS Withholding Calculator, it asks me to enter the number of deductions as 7 and tells me that ~$3k in taxes will be owed by me at tax time.

Now this is clearly a bad suggestion as the IRS will assess me a penalty for owing more than $1k at tax time?

How do I then use the IRS Withholding Calculator so I can fill out my W4 correctly?

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2 Answers 2

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When I go through the calculator I get 5, not 7. It also suggest a $250 refund, not owing anything.

Instead of figuring out a calculator, let's just solve your problem. You will gross $76667, correct? (85K * 2/3 year, plus $20K total)

After $12,200 standard deduction and $7,800 exemption, you have a taxable $56667. A tax bill of $7608, but you say a $1K credit, so $6608 is what you need withheld. 17 checks of $3270, and you need $389 withheld from each check. With no allowances, the withholding is $424 per check, and you're on track to have a refund of $604.

See Publication 15 (aka Circular E) for the math. The truth is - the calculators work best when you have a real annual income, not a mix, and not income you earned but need to pay tax on. I'd not cut any check for estimated tax on April 15th. Go with zero allowances and check the YTD numbers in September. In December, check again to claim the right number in 2014.

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    +1 The truth is - the calculators work best when your have a real annual income... I would also make sure you make the safe harbor numbers so that you don't get hit with penalties for underpayment
    – mhoran_psprep
    Apr 13, 2013 at 14:37
  • great point mhoran, some don't mind owing as long as they owe no penalty.
    – JTP - Apologise to Monica ♦
    Apr 13, 2013 at 19:59
  • Your last sentence has been expanded more upon by Dilip Sarwate: this essentially implies I can skip paying my ES for Q1 2013 if I claim only 1 allowance (vs. your suggested 0 allowances which seems to me a bit too much) in my W4?
    – sekharan
    Apr 14, 2013 at 2:43
  • Yes. Given the mix of W2 income and contractor income, you can make up the shortfall the rest of this year. The payroll dept can change withholding on a couple week's notice. Whatever you decide, check to see you are on track in early September. 1 allowance for you will change tax withheld by about $900 over a full year. So $600 for the remaining time.
    – JTP - Apologise to Monica ♦
    Apr 14, 2013 at 3:10
  • Great. Since taxes due will not be more than $1k, I will owe no penalty if I select 1 allowance on my W4?
    – sekharan
    Apr 14, 2013 at 17:27
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There is a safe harbor provision. You do not owe penalties for underpayment for 2013 if you have paid at least 100% of the income tax that you paid for 2012 (110% for high earners) via withholding and/or timely quarterly equal payments of esitmated tax. The nice thing is that withholding can be counted as four timely payments of estimated tax regardless of when it was withheld. So, one trick to consider is to file a W4 form, see how much tax is withheld, and then file a new W4 in which the only change you make is that you ask for additional tax to be withheld. The amount of additional tax you request be withheld from each of the remaining paychecks for the year is determined by how much is withheld thus far, how much more you want to have withheld to meet the safe harbor requirements, and how many paychecks you still have coming for that year.

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  • This is a very interesting answer that I need to pursue further. I will ask the question after reading a bit more on the "timely quarterly equal payments of estimated tax" part aswell.
    – sekharan
    Apr 14, 2013 at 2:27
  • The first timely quarterly payment of estimated tax for the current year (on Form 1040 ES) is due on the same day as the income tax return for the previous year (April 15 or the next business day in Washington DC). If you miss the deadline, you can always use additional withholding over the rest of the year instead of Form 1040-ES.
    – Dilip Sarwate
    Apr 14, 2013 at 11:44
  • I appreciate this input. I am selecting JoeTaxpayer's answer just because he included the link to the document and the effort he put in calculating. Both yours and his should be the complete answer though.
    – sekharan
    Apr 14, 2013 at 17:25
  • Instead of the two-step process, you can write down 99 exemptions and additional withholding of the desired amount. The IRS doesn't care unless you underwithhold (and if you do, they'll just charge you the normal underwithholding penalty).
    – stannius
    Feb 29, 2016 at 1:00

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