Submitted by Rachel R on Wed, 10/01/2014 - 1:14pm
Payroll tips for year end
Image source: Flickr user 401(K) 2012
Today is the first of October which is day one of the fourth quarter. It's hard to believe it's 2014, much less that it's the last few months of the year. Now is the time to look closely at your payroll and tax strategies to make sure you are making smart choices. These can save you on taxes, help you have money on hand for the holidays and shore up your finances.
Have you paid in too much in taxes?
While it can feel good to get a nice big tax refund check in Spring, what this means is that you have made the government a tax-free loan of your money for a year. That's money that could help you all year long. Use an estimator like the free one available at TaxBrain.com along with your most recent pay stub and your 2013 tax return (if nothing much has changed).
This will allow you to estimate what your 2014 income taxes will be (roughly) and compare it to your withholdings. If you have over-withheld, you can adjust your witholdings for fourth quarter to withhold far less so you don't keep overpaying. If you have paid in way more than you need, submit a new W4 to your payroll office increasing your dependents which will decrease your withholding.
Tweaking your withholdings (appropriately) can be a great way to beef up your paycheck before the holidays and put money in your pocket instead of loaning it to the government. A word of caution, though, you should never under-withhold. This can get you in trouble. But if you've already paid in more than you'll owe, reducing it to keep from over paying is understandable.
Be sure to adjust your withholdings again in January, but you may want to be more conservative in 2015. For instance, if your income taxes are $8,000 typically, having $160 per biweekly payroll check withheld will cover your obligation without over-withholding and draining your disposable income.You also don't want to end up owing the IRS come tax time in April, so use caution. Also examine your North Carolina state taxes and make sure you're not over-withholding there as well.
How much have you contributed to your 401(k)?
Do you participate in your company's 401(k) plan? You should anyway, but definitely so if they offer a match since that's free money toward your retirement. For 2014, the maximum contribution is $17,500. Your employer match doesn't count toward this amount. If you have not it this maximum, you can increase your contribution at year end to try and reach it.
Not only does this put more money aside for your retirement, but it also decreases your tax liability. Money put into this account directly reduces your taxable income If you were over-withholding on payroll but don't need the extra cash in your pocket for the holidays, put it toward your 401(k). If you can afford it, maxing out your 401(k) each year is wise. If you haven't simply, submit a change form to your payroll office asking to increase it.
If you have an employer match, it's a better strategy to withhold evenly throughout the year to maximize the match. But in a pinch, maxing it out at year end is better than not maxing it out. As with your payroll tax adjustment, be sure to readjust it at the beginning of the year. If you get a year end bonus, this is a great way to either cover holiday costs or beef up your retirement account.
You should never adjust your payroll to below an amount that will cover your estimated income tax liability. While you don't want to loan the government your money for free, you also don't want to under-withhold and get slapped with a hefty tax bill next year.
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