What Your CPA Wants You to Know
A podcast for entrepreneurs! We are a husband and wife team running our CPA firm together. We know just how difficult it can be to take your business dream to a reality. Our mission for this podcast is to guide, empower, and educate entrepreneurs in an easy-to-understand way! We want business owners to have the information that they need when they need it, AND without the hefty accounting invoices from a CPA! Follow along for practical advice, tips, and tricks from a CPA who knows what it is like to run a business, and strategies to keep your business thriving from an MBA! We will also show you how to run a business while keeping your family and sanity intact along the way!
What are you waiting for???
What Your CPA Wants You to Know
73. Updating Your W-4 Form: Why It's Crucial to Get It Right
Throwback: In this episode we explain the importance of keeping your W-4 in check, ensuring you're not caught off guard with a hefty tax bill or a disappointing refund.
We get so many questions about the W-4 form and how it should be filled out so we are breaking it all down in this episode! If you had a big tax surprise this year, this episode is for you!
Create a STAN Store - Click here to try it out!
Here's where you can find us! Follow along on Instagram for lots of free content for business owners daily!
Shop our business guides!
Our Instagram Page
Our family page
So even if you filled it out and you put your deductions on there properly, it can still be inaccurate. And that's just because it doesn't know the whole equation. It doesn't know what your spouse is going to make, doesn't know all the credits that you're getting. It doesn't know all of these items that have to go into the final number.
Speaker 1:Welcome to what your CPA Wants you To Know a podcast for business owners and those planning to make the jump into entrepreneurship. If you're thinking, I've got a great business idea, but what's next? This podcast is for you.
Speaker 2:I'm Carson Sands.
Speaker 1:And I'm Taryn Sands, and together we started our CPA firm. We've grown exponentially over the past six years.
Speaker 2:I'm a CPA with over 10 years of experience helping people start and grow their businesses.
Speaker 1:And I'm an MBA with a specialization in marketing and entrepreneurship.
Speaker 2:Follow along as we share the ins and outs of running a business while keeping your family and sanity intact.
Speaker 1:And how to save tax dollars without breaking any IRS rules or triggering a painful audit.
Speaker 2:We're here to share everything your CPA wants you to know.
Speaker 1:In a fun and easy to understand way. Let's get started. Let's do it way. Let's get started, let's do it. I have a very special guest today on the podcast, so if you don't remember his voice, I have my husband, carson Sands, with us. He's back.
Speaker 2:It's me, I'm back.
Speaker 1:He climbed out of his hole, which is his very dark office, and stopped doing tax returns, just long enough to record this podcast with me today.
Speaker 2:It's not always dark. Sometimes the sun is on that side of the building.
Speaker 1:Yeah, I don't know. He likes to work in a very, very dark office. It's just very strange. The light of the tax return sustains me me it must be a CPA thing, I don't know. So it is filing day today, so we are not actually super busy on filing day, like most people think. We're just kind of wrapping up things and the work has been done. We don't try to stress ourselves out about any tax returns on filing day.
Speaker 2:Yeah, we stay real busy all day, but not doing anything hard. All the hard stuff is done. We're just dotting the I's, crossing the T's, making sure everything is actually filed and turned in.
Speaker 1:Yeah, so we have a pretty light day today, we're not working late and tomorrow we're taking the whole day off. But our podcast goes out every single Wednesday, so we wanted to do just a really quick episode that will come out tomorrow, and we thought we should do it over something that we have come across a lot this tax season, and that is the W-4 form.
Speaker 2:Yeah, so that's the form where you can decide how much you want to withhold on your payroll check.
Speaker 1:So the reason why this is important to talk about is because if you're a W-2 employee and you come to us for us to do your tax return, there's really not much we can do for you. If you're a W-2 employee, there's nothing we can write off, there's no really anything special we can do, so the only thing that you can do is adjust your withholdings. So if you had a big surprise this year and owe a lot in taxes, our number one suggestion is going to be update your W-4 form so you don't have a surprise next year. So, first and foremost, what is a W-4? And when would you fill it out for anyone that's not sure what we're talking about?
Speaker 2:So when you first walk into your new job on day one, they're going to make you fill out this W-4. So you've probably done it many times and that's just the form that tells them what kind of deductions and credits you have, whether you're married or not, and that helps them decide how much they're supposed to withhold on your paycheck.
Speaker 1:True or false question? Can you only update your W-4 form once per year?
Speaker 2:No, you can update it whenever you want. Just fill out the W-4 and provide it to the HR department or whoever's in charge of payroll at your company.
Speaker 1:Anytime during the year. If there's going to be a significant change in your income or one of you change jobs or you just want maybe a bigger refund, you can always go to your HR department and have them update the form. Today we want to go over that form in a little bit more detail and what you would put on each line if you need to update your form. But one of the things I wanted to look at first because this always comes up is what is wrong with the W-4 form. Why does it not work as well as you would think? Why is it often wrong?
Speaker 2:Well, when they first invented the W-4 or whatever its predecessor was that decides how much will be withheld, the tax code was much simpler and most of the time, only the husband worked, and so it was really easy to decide okay, if you make this much money, this is how much withholding you should have, and you'll be pretty close to not owing or getting a refund at the end of the year.
Speaker 2:But as more and more people had spouses that begin to work, and those spouses have either a lot more income than you or a lot less, it makes it hard for the withholding tables to know exactly how much you're going to be paying in taxes, because they don't know your tax brackets or your tax rate. So another problem with the W-4 is that, as the tax code has got more and more complicated, there's certain things that it just can't take into account. Or it could take it into account if you use the pages and pages of worksheets that go along with it to fill them out and come up with all the numbers and add several different numbers to several different lines on there. Most people ignore all that. They fill out two or three lines and move on because they want to get started with their work.
Speaker 1:Right. So there's just way too many numbers that go into that actual final number that you see on your tax return and it's just really impossible for them to know because they're only getting part of that equation. So even if you filled it out and you put your deductions on there properly, it can still be inaccurate, and that's just because it doesn't know the whole equation. It doesn't know what your spouse is going to make, doesn't know all the credits that you're getting. It doesn't know all of these items that have to go into the final number.
Speaker 1:So one thing that always comes up during tax season is that people are bringing all their tax items in and we're scanning in all of these work papers like W-2s and 1099s. We can often look at a W-2 and see how much the withholding is. That would be in box two. We can look at box two and usually just say, oh, that's like way too low or they did a really great job of withholding. So if you want to look at your W-2, that's a really good place to start. If you were confused as to why you owed so much, take a look at it and see what the percentage was that you actually withheld during the year.
Speaker 2:And one thing I just want to jump in and say is if your withholding is way off, it's easy for people to jump to the conclusion that your employer screwed something up. That's very unlikely. It's most likely that they followed exactly what you put on the W-4 and either the withholding tables just got it way wrong, and that's really the IRS's fault, or you filled out the W-4 wrong and sorry, but that's your fault. So it's very rarely your employer's fault.
Speaker 1:And it's also very, very rarely that it's your CPA's fault.
Speaker 2:Or never, since we don't do your W-4. Right.
Speaker 1:So it is really a good idea, now that you have your 2022 W-2, to take a look at that box two and see how much your federal income withholding was. So let's say, we look at that and you withheld 3%. That's a really big red flag.
Speaker 2:And to determine that, you would just divide that box two by your box one wages and that would tell you what your withholding percentage was.
Speaker 1:3% is probably not enough for pretty much anybody, unless you make almost no money or have dozens and dozens of kids, which means dozens and dozens of child tax credits means dozens and dozens of child tax credits and it's just really impossible for us to give you a specific number what that box could be, because all of the tax rates are different, everyone falls into different brackets and so there's just not one number.
Speaker 2:But we generally want to see at least 10% withheld in that box 10% is a good starting point, and if your income's high or your spouse's income is high, then it's probably going to need to be a lot more than that.
Speaker 1:So today we want to explain to you exactly how to update that form if you did find yourself owing too much and you want to go back and update the withholding.
Speaker 2:And this will also help explain how to update it if your withholding is too high and you're getting a $5,000 or $6,000 refund every year and you don't want to, so the first thing you can do is skip step one and step two.
Speaker 1:So we're looking at a W-4 form now. So if you don't have one in front of you, just Google it and the PDF will pop up.
Speaker 2:So let's say you have that in front of you, let's skip to step three. So let's say you have that in front of you, let's skip to step three. This would be a great thing to check if you've had the same job for a while and maybe you've had a kid or three kids since the last time you updated this and you're getting a huge refund now because you have $6,000 in tax credits you didn't have before. Well, I mean, if you'd rather get more money on every paycheck instead of waiting for the government to send you money back, you can just go ahead and add those kids to step three here and your withholding will go down. You'll get more every paycheck. Just know you're going to get less on your refund next year. So that's a pretty simple fix.
Speaker 2:Now for the next step. Let's say you owed in 2022 and you don't want to owe in 2023. Well, let's assume your income is going to be around the same. You don't want to owe in 2023. Well, let's assume your income is going to be around the same. Skip down to step four, line C, where it says extra withholding. This is the easiest way to make sure you're not going to owe next year. Figure out how much tax you owed and divide that by the number of paychecks you get per year. So if you get paid weekly, that would be 52. Per year. So if you get paid weekly, that would be 52. Every other week, 26. Twice a month would be 24. Or if you get paid monthly, that would be 12. So if you take the total that you owed and divide by that number, that's the number you put on line C, that's the extra withholding that you'll get in each paycheck and that will ensure that you don't owe taxes next year, unless you make a lot more money.
Speaker 1:So things can change from year to year. But if you did get in that situation, the best thing to do moving forward is to update that form. And where you add the extra withholding is on step four, letter C. It says extra withholding and it does say enter the additional tax you want to withhold from each pay period.
Speaker 2:Yeah, and one asterisk to that is that if you're listening to this right away, it's going to be April. If you're listening to this later in the year, it's going to be even later in the year. So that withholding is going to start on your next paycheck. So there's a chance you'll still be a little bit under withheld for the year. So if you're, let's say, exactly halfway through the year and your next paycheck is going to be the first paycheck of July, then what you might need to do is divide how much you owed in taxes by however many paychecks you have left in the year, and if you put that number as your extra withholding, that will make sure that you don't owe any taxes. The problem with that is now you're going to need to update it again as soon as January comes around, or you'll be over withholding the next year.
Speaker 1:Right and, like we said earlier, some people think you can only update that form once a year. You can update it as many times as you like.
Speaker 2:But if you do it every week then your employer is going to get really tired of it.
Speaker 1:Yeah, you're not going to be popular in the HR department.
Speaker 2:So one last thing about all of this is let's say you got a new job or a promotion and your income is changing a lot. Well then, it won't be as simple as dividing what you owed by the number of paychecks, because you're going to make more next year, dividing what you owed by the number of paychecks because you're going to make more next year. So one thing you can do is just look at your pay stub and see if your federal income tax withholding is 10% or 12% or 20% of your total pay. Compare that to what tax bracket you're going to be in, and you need to be getting pretty close to that number. Now your withholding can be a little less than that number because you're going to have standard deduction or itemized deductions, maybe some child tax credits, but you do want it to be close to that number. If you're going to be hitting the 24% tax bracket and your withholding's 10%, then you're going to be pretty mad when April rolls around next year.
Speaker 1:It's a good idea just to always check your pay stub middle of the year, end of the year and make sure you're on track, because we see these W-2s come in and we can automatically see that that's just not enough to cover what tax rates are. Now every person's gonna be in a different tax bracket. We can't give one blanket statement of oh, you should definitely be withholding this much, but you personally can know which tax bracket you fall in and that's going to really help you decide how much you need to be paying in all year, absolutely.
Speaker 1:So I think that pretty much wraps it up for today.
Speaker 2:Yeah, thank you for listening.
Speaker 1:If you found this episode helpful, please share it with a friend or share it on social media. That's how we grow this podcast and we would really appreciate it Until next time. Thank you so much for listening to what your CPA Wants you to Know Podcast. What your CPA wants you to know podcast.
Speaker 2:This podcast is intended to provide accounting and tax information for educational purposes only. All tax situations are unique and should be handled with the assistance of a tax professional.