Withholding

To ensure the government has a steady supply of cash, your employer is required to withhold a portion of the tax you owe each time you’re paid. It’s the employer’s responsibility to send that withholding to the IRS. If your taxable income isn’t money you earn by working or if nothing is withheld by your employer, you may be required to make estimated payments four times a year to cover at least 100% of what you paid the previous year or at least 90% of what you’ll owe for the current year. Examples of income on which, generally, nothing is withheld are unemployment benefits, alimony, self-employment income and investment income.

There’s no penalty if the tax that’s due is less than $1,000 and you had no tax liability in the prior year. If you collected unemployment benefits, check to see if your state withheld tax. If it didn’t, then you’ll need to pay tax on your unemployment along with the rest of your income.

The tax your employer withholds is calculated based on information you provide on IRS Form W-4. To fill out the W-4, you need to know your filing status, and the number of withholding allowances you claim. Allowances are usually based on the number of dependents you claim and other factors such as investment income or a second job. The more allowances you take, the less your employer will withhold.

Your goal should be to have about the same amount withheld as you’ll end up owing in taxes. If that doesn’t happen, it may be a good idea to revise your W-4, to increase or decrease the amounts withheld from your paychecks.