Withholding allowance
WHAT IS WITHHOLDING ALLOWANCE
Withholding allowance is a type of allowance that is claimed by a person from the employer for using it in the amount of income tax that is withheld from the paycheck of the employee. There are many countries where withholding allowances are quite common like United States etc. For making claims regarding withholding allowance, there are some specialized formats or forms that are used like W-4 in United States. It is quite obvious that if a person withholds more allowances from his employer, there would be less income tax that would be withheld. Generally, it has been seen that a person claims only one allowance for himself, his spouse and his dependents each. A person can also adjust the number of allowances as per his financial condition so that there is not much income tax withheld.
THE WITHHOLDING ALLOWANCE FORM IN UNITED STATES
W-4, the form that is used for claiming the withholding allowance, is basically a federal form used for establishing the withheld amount from the pay.W-4 form is also called as Employees Withholding Allowance Certificate and is used by the employers in United States for the computation of state as well as federal income tax withholding . Now the question arises why should a person file the W-4 form ? A person needs to file this form at appropriate time so as to allow the employer to withhold a specific amount for withholding the income tax from his pay.In case, a person does not files the W-4 form, there would be no information provided to the employer, it is bound to withhold all the amount pertaining to income tax from his wages and the person would be treated as if he were single and there are no dependents living with him . Thus, filing of W-4 ensures that the employer is withholding only that much amount of income tax from the paycheck that a person is supposed to pay. A person is required to file the W-4 form in different types of circumstances. For example, when any person begins working with any new employer, he is supposed to file the W-4 form. Similarly, when a person looses any dependents or adds more dependents, he is supposed to file the W-4 form. In case the marital status of person is changed due to any reason, he is supposed for file the said form. Last but not the least, if there has been any substantial change in the deductions of a person, he is required to file the W-4 form .
OTHER RELATED ASPECTS
People are generally seemed confused about the number of withholding allowances that can be claimed by them. A person is entitled for only one withholding allowance for himself, one for each of dependents and one for his or her spouse . A person can also go for additional withholding allowances if he feels that there would be a reduction in the amount of tax payable by him in the following year. There are many cases where a person can easily know about more itemized tax deductions in income tax in following year like huge medical bills etc. In such cases, it is better if a person goes for additional withholding allowance filings. Similarly, if a person comes to know that there would be additional tax credits in the following year, he can file more than one withholding allowances. But a person should be careful that he is not filing the withholding allowances more than his entitlement. The maximum numbers of withholding allowances that can be made by a person are given in DE-4, which is provided by EDD or the Employment Development Department. This form is available in the form of a worksheet. A person is not allowed to withheld his wages in percentage terms and rather, he can specify the amount in dollars that has to be withheld by the employer.
Similarly, a person is not permitted to make any claim regarding exemption from withholding allowance filing.This is because if a person does that, it would simply mean that he did not owe any income tax last year and all the income taxes withheld have been refunded to him . If a person is employed on a part time basis or on a seasonal basis, he can make exemption of the above allowance . There are many students that work on part time basis for meeting the expenditure relating to education and all those students are exempt from filing the withholding allowance. If a person owes any tax to the state or federal government and makes exemption in a fraudulent manner, he has to pay $500 towards each false filing. Apart from this, he can also be imprisoned up to one year. The amount of fine can go up to $20000.The employer of a person is also required to send copy of the withholding allowance certificate of W-4 form to IRS or Internal Revenue Services . The person may be asked by the authorities to justify the claim made by him. The employer can also be sent notice if no justification is made in time . In such cases, the employer may also be asked to adjust all the withholdings of a person in his paycheck.
The person should review his W-4 form or withholding allowance certificate for ensuring correct payroll taxes withholding for a particular year.If the tax withholding allowance amount of a person is huge, the employee can make in-effect the interest free loan to the United States government . He would not be able to make use of those funds until these refund claims are filed at the end of year . Similarly, if the person is not able to deduct the appropriate withholding allowance, he may be subjected to a penalty when he files the income tax return. So far the rate of this penalty is concerned, it is generally applied by deducting 90% of the tax liability for a particular year from the total o withholding allowance payments and payments made towards estimated tax.In case a person has purchased a home or has refinanced a home or even sold a home, he must check W-4 form .
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