J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

26.4 Are You Withholding the Right Amount?

You do not want to withhold too little from your pay and you do not want to withhold too much. You may need to withhold more to avoid a large tax payment or an estimated tax penalty (26.1) when you file your return, especially if you have substantial income from investments or a business.

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Planning Reminder

Part-Year Employees May Avoid Overwithholding

Starting a new job in the middle of a year presents a withholding problem. The amount of tax withheld from your paycheck is figured by taking your weekly pay and multiplying this by a 52-week pay period. For example, if as a recent graduate you start a job on July 1 and your weekly pay is $1,000 for 26 weeks (July 1–December 31), your withholding will be based on an annual income of $52,000 ($1,000 × 52 weeks) and not the $26,000 you will actually earn that year. This will result in overwithholding. To alleviate this problem, you may ask your employer to calculate withholdings on what is known as the “part year” method if your work days during the year are expected to be 245 or fewer. This formula calculates withholding based on actual earnings rather than expected earnings over a full year of employment. As an alternative, you may elect to claim extra exemptions on Form W-4, which has the same effect of reducing the amount withheld each week from your paycheck.