A wise person once said that paying taxes and death are the only guarantees. Do you seem to get hit with a BIG annual tax bill? Estimating your taxes will help you plan accordingly. Estimating taxes is especially easy if you get a W2 every year from your job as most nursing professionals do.
Errors in Estimating Taxes
In the last couple of years since getting married, we’ve owed increasingly larger amounts of federal taxes when filing our annual tax returns. We owe a significant chunk of taxes for the 2019 tax year.
This is surprising as we both have consistent W2 jobs meaning we get regular paychecks from an employer. We don’t have much outside income that would account for the short-fall in taxes owed. Somewhere there was an error in estimating taxes withheld likely when we filled out our W4 forms.
The W4 form is one of the many pieces of paperwork filled out when starting a new job as I did last year as a new grad nurse practitioner. The W4 hasn’t been the most straightforward form to fill out if you have a family or additional sources of income.
Owing taxes isn’t a big deal as we have savings that can cover. I prefer to owe the government than pay them too much and get a refund.
The problem comes with an IRS underpayment penalty if the sum owed is above a certain amount due to an error in estimating taxes. Generally this penalty kicks in around $1,000. Check with a tax pro for your specific situation.
The ideal situation is to neither owe the IRS nor get a tax refund at the end of the year.
IRS Tax Withholding Estimator
Thankfully, the IRS provides a great tool on their website for estimating taxes you should pay with every paycheck. This really is a simple process if you only have a W2 income as most nurses do.
Traditionally known as the W4 form. The IRS has a new online tool they call the Tax Withholding Estimator. You plug in your numbers from your family’s pay stubs, and the Estimator spits out how much taxes you should be withholding with every paycheck.
They even have a slider so you can adjust the withholding so you’ll get a refund. I’m not sure why anyone would intentionally want a refund except for the happiness everyone feels with getting a refund check.
They will give you a pre-filled W4 form to print for your employer if you need it. No more confusing W4 forms and formulas to trudge through!
I plan on running the official free IRS Tax Estimator every year so we avoid another big tax bill on tax day on our journey to FI.
No more unexpected tax bills or big tax penalties!