Thank you for taking the time to write that out and explain. I’m in a similar scenario as the OP with the added complication that my income (the higher one) can swing $20-30k a year due to overtime which is impossible to predict or know how it’s gonna play out until the end of the year.You have received excellent advice regarding your options for correcting your current withholding shortfall for 2024. I wanted to address your general question about how to set up your W-4 for future years.
On Form W-4, the Specific Instructions for Step 2 states:Option (a) most accurately calculates the additional tax you need to have withheld, while option (b) does so with a little less accuracy.
Note that on the Form itself, the text following Step 2(c) states:As a result, we see that for your scenario where one income is less than half the pay of the other job, the accuracy of the methods are (a) > (b) > (c). So we should ideally not use (c).This option is generally more accurate than (b) if pay at the lower paying job is more than half of the pay at the higher paying job. Otherwise, (b) is more accurate
While (a) is the most accurate, it does require several steps to be done correctly and I have heard anecdotally that people have low confidence in the output as there is often confusion on the inputs. Let's evaluate how accurate option (b) is for your circumstances. Let's take Form W-4 at face value and also assume that there are no other deductions other than the standard deduction.
Option (b) asks us to look at the intersection of the two incomes on a given table, take that output and divide by the number of pay periods for the higher paying job, and enter that amount as additional withholding per period in Step 4(c).
Again, we're assuming $160k and $65k income with no deductions other than the standard deduction. For simplicity, I'll assume monthly pay periods. The intersection of the table for those two incomes is $12,110. Dividing by 12 pay periods gives us an additional withholding for Step 4(c) of approximately $1009.
How good does this extra withholding do? Let's calculate the approximate per period withholding by looking at IRS Pub 15-T. This Publication has a step-by-step method for calculating the federal tax withholding for any given W-4 inputs, but the short answer is that the $160k job will withhold $2,582 total per pay period, including the $1,009 added by Step 2(b). The $65k job will withhold $319 per pay period. Over 12 pay periods, both jobs will withhold a total of $34,812 in federal income tax for the year.
What is your tax liability under the above assumptions? For MFJ income of $225,000 and a standard deduction of $29,200, your taxable income would be $192,800 with a federal liability of $33,182.
In short, using Step 2(b) calculations and pay bands, you would withhold $34,812 for the year on a tax liability of $33,182 with an approximate refund of $1,630.
If making 401k or other pre-tax deductions, I find it best to subtract these from gross wages before finding the intersection of wages in Step 4(b). For example, assuming $23,000 in 401k deductions from both jobs leads to an additional per period withholding of $728 instead. The annual withholding would be $23,844 against a federal liability of $23,062 for a refund of $782. Again, accurate enough in my book.
I have run these kinds of calculations for several different pay differences over the years, and in my opinion Step 2(b) is accurate enough.
Statistics: Posted by Valhalla7 — Sun Oct 27, 2024 2:53 am