When you start working for an employer, they need to know how much federal income tax to withhold from your paycheck. For this, you need to fill a W4 form, including your exemptions and allowances. In theory, the fewer allowances you claim, the less money you owe the IRS.
Sometimes, though, you may claim 0 allowances on your W4 but still owe taxes. Here, we will talk about why you owe taxes despite claiming 0 on the form.
What is a W-4 Form?
An IRS W-4 tax form is a form an employer uses to determine how much federal income tax they need to withhold from an employee's paycheck. This form includes the number of allowances and personal exemptions you will receive on your payday. You need to fill this form the day you join a company.
Your employer uses this W4 form until you fill a new one. You often need to fill a new W4 when your financial position changes. This form is important because it tells the accountant of the company how much your paycheck adds up to.
If you claim more allowances, your employer withholds a smaller amount from your paycheck. You then receive more money. However, this also means that you will not get a refund, and you may even owe some money to the IRS. Claiming few or no allowances means you will be eligible for a refund.
You can either hire a CPA to handle your taxes or do them yourself. Either way, knowledge of how a W4 form works is necessary.
How Many Allowances Should You Claim?
The number of allowances you should claim depends on some personal circumstances. This includes relationship status, children, and how long you have been at a job.
The best idea is to find a balance. You should not claim too many allowances, or you might end up having to pay the IRS. Claiming 0 allowances means that too much money will be withheld by the IRS.
The allowances you can claim vary from situation to situation. If you are married with a kid, you can claim up to three allowances. If you want a higher tax return, you can claim 0 allowances. If you are married and have two kids, you can claim three or more allowances.
If you are single, you can claim 1 allowance. If you have one job, you can request 2 allowances. If you are single with a kid, you can claim 2 allowances. However, you should always be cautious of the tax return.
With 2 kids, when you are single, you can claim 2 allowances. For more than two kids, you can claim an additional allowance for each kid.
A married couple with no children can claim 1 allowance each. You should note that if someone else mentions you as a dependent, you will not get any allowances.
In the case of children, you can claim up to $1,000 per kid provided that they are under 16.
Why Do I Owe Taxes If I Claim 0?
If you claimed 0 and still owe taxes, chances are you added “married” to your W4 form. When you claim 0 in allowances, it seems as if you are the only one who earns and that your spouse does not. Then, when both of you earn, and the amount reaches the 25% tax bracket, the amount of tax sent is not enough. You will hence need to pay the IRS some money.
The amount of income you and your spouse earn combined goes too close to the standard deduction, which does not contribute to under-withholding. With two W2s, a doubling of the tax bracket occurs, meaning that 0 will not be enough to withhold the right amount.
Another thing that can lead to you owing taxes is if there is a huge disparity in income.
How to Fix This Problem
One thing you can do if you owe taxes after claiming 0 is to set your status to single. You can also request additional withholding on your W4. To do this, use M-0, M-0 on Line 6, or use this tool.
You and your spouse can also use Single withholding tables. For this, check the “Married but withhold at higher Single tax rate.” Then, there is a chance you can utilize S-2, S-2. This way, instead of the married tax bracket, the IRS will see your withholding tax using the Single bracket. This is half the amount of the married bracket.
To ensure that you will not owe taxes, divided next year’s income by this year’s income. Multiply the amount by the tax rate. Divide this number by the number of paydays remaining in the year. Enter the amount you get in Line 6 of the form.
Should I Claim 0 or 1 if I am Married?
As mentioned above, claiming 0 when you are married may result in your combined incomes reaching the tax bracket. You will then owe some taxes. A good option, therefore, is to claim 0 with an additional amount withheld.
You can also claim single and 1 allowance or single and 0 allowances to make up for this amount.
How to Owe Nothing on Federal Tax Return
To owe nothing on federal taxes, you need to pay attention to your W4 form and make the necessary estimations and adjustments. You need to keep in mind that you can submit a W4 form whenever you want.
You need to make sure you do not have too much or too little withheld. Try to control how much your employer withholds.
First, you need to know how much tax you owe at all times. For some people with a salaried job, this is an easy task. For freelancers and people with flexible incomes, this can be a challenge. Luckily, there are some tools you can use. These include:
- Tax Withholding Estimator
- Online Check Calculator
- Sample Tax Return
After you know your tax amount, you can distribute it among paydays to know what withholding tax amount you need to reach a target. You can then ask the accounting department for a new W4 form and fill it accordingly.
If you see that the withholding amount is low, calculate the additional amount of tax you want to be withheld and add it to the form. If the withholding amount is too high, you can increase the allowances you claim on the W4 form accordingly.
One thing to keep in mind is that your withholding tax needs to be 90% of your current year’s tax liability. This way, you will avoid underpayment penalties.
Following these steps will help you to bring your tax return to a suitable, balanced number. If done right, you can bring the federal tax return to 0.
Is it Better to Receive a Refund or Owe More Taxes?
According to most financial experts, it is better to owe taxes than to receive a refund. Even though getting a refund means you earn some extra cash, it also means that you overpaid. In the process, you gave the government a loan on which you do not even receive interest.
Instead of giving your money to the government, it is better to keep it and spend it on more important things. By owing taxes rather than getting a refund, you have more control over your money.
Others maintain that getting a refund is better, but only if it is small. This is because a small refund will mean there will not be any penalties. In such a case, having some extra money instead of struggling to pay taxes is a better option.
What If I Don’t Submit My W4?
If you do not submit your W4 form, your employer will still have to withhold tax from your paycheck. Since they will not know your details, they will withhold tax, assuming you are single with zero allowances. This can work if these details match your actual circumstances, but if you are married with kids and need more allowances, it can turn out to be unfavorable.
Additionally, if you want to manage your W4 form to balance the amount of withholding tax you owe, you need to submit a W4 form every time your income or financial position changes.
Not submitting a W4 form can result in overpaying and underpaying, which can put you at a disadvantage.
Conclusion
You may owe taxes even if you claim 0. This occurs when you set your relationship status as “married,” giving the impression that you are the only one who works. Combined, the income surpasses the tax bracket, resulting in a higher tax. To avoid this, you need to file as Single or Single with additional withholding tax.
You should always keep track of how much withholding tax you owe so you can add allowances and withholding tax accordingly. This way, you can strike a balance, avoid overpaying and underpaying and avoid any kind of penalties placed by the IRS.
References:
https://www.investopedia.com/articles/taxes/08/owe-nothing-federal-tax-return.asp
https://www.wsfa.com/story/14060741/how-to-owe-nothing-on-your-federal-tax-return/
https://www.policygenius.com/blog/owe-taxes-or-get-refund/
https://www.communitytax.com/tax-allowances/
https://navicoresolutions.org/how-many-tax-allowances-should-you-claim-do-you-know/
https://atax.com/blog/23/how-many-allowances-should-i-claim
https://pocketsense.com/better-file-one-dependent-rather-zero-w2-11350.html
Final Thoughts
If any of the information provided above made you feel confused, don’t stress because you are not alone. There are many other businesses that have faced similar problems in the past. However, with time, they have fared well with just a little help.
If you are struggling or just don't have the time to keep up with it, it may be time to have Hall Accounting take over and invest with accurate accounting records and financial reports. The Hall Accounting team will manage your records from start to finish and make sure all adjustments are timely recorded. This option is also feasible for small businesses because it is cheap and hassle-free, at a fixed monthly rate. If you are interested, please feel free to email us at proposals@hallacctco.com and we will get you a free quote!
FUTURE IMPORTANT DEADLINES
3/15/22
Deadline for partnerships and S-Corp returns for 2021
4/18/22
Deadline to file individual tax returns for 2021
First-quarter estimated tax payments due for 2022
Deadline to contribute to HSA for 2021
Deadline to contribute to IRA for 2021
FAQs
Is it better to claim 1 or 0 on your taxes? ›
By placing a “0” on line 5, you are indicating that you want the most amount of tax taken out of your pay each pay period. If you wish to claim 1 for yourself instead, then less tax is taken out of your pay each pay period.
Why do I still owe money on my tax return? ›If you finish your tax return and are confused as to why you need to send the IRS a check, there is only one possible explanation for this: you paid less tax during the year than you owed for your income level.
What is the difference in claiming 0 or 2 on taxes? ›If you claim 0 allowances or 1 allowance, you'll most likely have a very high tax refund. Claiming 2 allowances will most likely result in a moderate tax refund.
Will I get a refund if I claim 0? ›Claiming 0 Allowances on your W4 ensures the maximum amount of taxes are withheld from each paycheck. Plus, you'll most likely get a refund back at tax time.
Will I owe taxes if I claim 0 Single? ›If you claim zero allowances, that means you are having the most withheld from your paycheck for federal income tax. If you didn't claim enough allowances, you overpaid in taxes and will get that amount back through a tax refund. If you claim too many allowances, the IRS will tell you that you owe them more money.
How do I stop owing taxes? ›Having enough tax withheld or making quarterly estimated tax payments during the year can help you avoid problems at tax time. Taxes are pay-as-you-go. This means that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year.
Is it better to owe taxes or get a refund? ›“In most cases it's better to owe than to receive a refund,” says Enrolled Agent Steven J. Weil, Ph. D. and president and tax manager of RMS Accounting in Fort Lauderdale, Florida.
Do owe taxes ever go away? ›In general, the Internal Revenue Service (IRS) has 10 years to collect unpaid tax debt. After that, the debt is wiped clean from its books and the IRS writes it off. This is called the 10 Year Statute of Limitations. It is not in the financial interest of the IRS to make this statute widely known.
Why is my federal withholding 0 on paycheck? ›If you're considered an independent contractor, there would be no federal tax withheld from your pay. In fact, your employer would not withhold any tax at all. If this is the case: You probably received a Form 1099-MISC instead of a W-2 to report your wages.
When should you claim 2 on taxes? ›You can claim 2 allowances if you are single with one child. That is if you are single and have one dependent who is your child.
Is it better to claim 0 or 1 on W4 if married? ›
You should claim 1 allowance if you are married and filing jointly. If you are filing as the head of the household, then you would also claim 1 allowance.
How much do you have to make to owe taxes Single? ›Not everyone is required to file or pay taxes. Depending on your age, filing status, and dependents, for the 2022 tax year, the gross income threshold for filing taxes is between $12,550 and $28,500. If you have self-employment income, you're required to report your income and file taxes if you make $400 or more.
How do I know if I will owe taxes? ›Estimating a tax bill starts with estimating taxable income. In a nutshell, to estimate taxable income, we take gross income and subtract tax deductions. What's left is taxable income. Then we apply the appropriate tax bracket (based on income and filing status) to calculate tax liability.
How much does a single person owe in taxes? ›Federal income tax brackets are designed to determine how much tax an individual owes in federal taxes. There are seven tax brackets an individual can fall into. In 2022, these range from 10% for single people earning under $10,275 up to 35% for individuals earning $215,950 or more.
Is it normal to owe taxes? ›Every year, certain taxpayers are surprised that they owe additional income taxes even though their employer withholds taxes from their paycheck each week. This is not as uncommon as you may think, and there are many reasons why it could happen.
Do you owe taxes the more money you make? ›The more you earn, the more taxes you pay—but the U.S. progressive federal income tax system lessens the bite somewhat. Since the system levies different tax rates on different portions of an individual's income, your entire income won't be subject to a higher tax bracket when you get a raise.
Should I be worried if I owe taxes? ›Owing any amount of money to the IRS – large or small – is a scary prospect, but ignoring the debt won't make it go away any faster. If you've completed your income tax return for the tax year and you're looking at a huge tax bill, it's best to take care of it right away.
Does the IRS come to your house? ›However, there are circumstances in which the IRS will call or come to a home or business. These include when a taxpayer has an overdue tax bill, a delinquent (unfiled) tax return or has not made an employment tax deposit.
What money can the IRS not touch? ›Federal law requires a person to report cash transactions of more than $10,000 to the IRS.
How much federal tax should be taken out of paycheck? ›Employers should withhold half (7.65%) of the 15.3% owed in FICA (Social Security and Medicare) taxes from an employee's gross pay. FICA taxes come in addition to regular federal income taxes, which change depending on your income level. There are seven tax brackets in 2022 and 2023: 12%. 22%, 24%, 32%, 35%, and 37%.
Will I owe money if I claim 2? ›
If you claim too many allowances, you'll owe the IRS money when you file your taxes. Your first instinct might be that it's better to overpay and receive a tax refund.
Is it better to claim 1 or 2 on taxes? ›If you'd rather get more money with each paycheck instead of having to wait for your refund, claiming 1 on your taxes is typically a better option. Claiming 1 reduces the amount of taxes that are withheld from weekly paychecks, so you get more money now with a smaller refund.
Will I owe money if I claim 1? ›Will I owe money if I claim 1? Claiming 1 reduces the amount of taxes that are withheld, which means you will get more money each paycheck instead of waiting until your tax refund. You could also still get a small refund while having a larger paycheck if you claim 1. It just depends on your situation.
How can I get less taxes taken out of my paycheck? ›- Complete a new Form W-4, Employee's Withholding Allowance Certificate, and submit it to your employer.
- Complete a new Form W-4P, Withholding Certificate for Pension or Annuity Payments, and submit it to your payer.
- Make an additional or estimated tax payment to the IRS before the end of the year.
The total due every pay period is 15.3% of an individual's wages – half of which is paid by the employee and the other half by the employer. This means that each party pays 6.2% for Social Security up to a wage base limit of $160,200 and 1.45% for Medicare with no limit.
Is it better to withhold taxes or not? ›When you have too much money withheld from your paychecks, you end up giving Uncle Sam an interest-free loan (and getting a tax refund). On the other hand, having too little withheld from your paychecks could mean an unexpected tax bill or even a penalty for underpayment.
What should I put on my w4 to get more money on my paycheck? ›Simply add an additional amount on Line 4(c) for "extra withholding." That will increase your income tax withholding, reduce the amount of your paycheck and either jack up your refund or reduce any amount of tax you owe when you file your tax return.
What are the 3 ways you can reduce your taxes deducted? ›- Take advantage of tax credits.
- Save for retirement.
- Contribute to your HSA.
- Setup a college savings fund for your kids.
- Make charitable contributions.
- Harvest investment losses.
- Maximize your business expenses.
Under age 65. Single. Don't have any special circumstances that require you to file (like self-employment income) Earn less than $12,950 (which is the 2022 standard deduction for a single taxpayer)
How many months can you go exempt without owing taxes? ›An exemption from withholding is only good for one year. Employees must give you a new W-4 each year to keep or end the exemption. If the exemption expires, withhold federal income tax according to the employee's Form W-4 information.
What percentage of my paycheck is withheld for federal tax 2023? ›
2022 Tax Brackets (Taxes Due in April 2023)
For the 2022 tax year—and the return you're filing in 2023—there are seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
Penalties. Failure to do so will get the attention of the IRS and can result in civil and even criminal penalties. Sometimes the failure to pay is an oversight or a lack of understanding of what legal duties exist.