I estimate I’ll owe ~$20,000 in federal income tax for the year, excluding Social Security and Medicare. No matter how I adjust my W4, I can’t get my withholding to match this amount, especially with a mid-year bonus compounding the issue.
Would it be possible and legal to claim exempt from federal taxes on my W4 and pay $5,000 per quarter in estimated taxes instead?
No, it’s not legal to claim exempt unless you had $0 tax liability in the prior year and expect the same this year. Instead, you can add the expected shortfall to your W4 under the ‘Additional Withholding’ section. Divide the $20,000 by the number of pay periods and enter that amount.
@Dara
That’s helpful! I’ll try adding it to the W4 after my bonus hits, as it tends to throw off the withholding estimates. Thanks!
Claiming exempt isn’t legal unless you had $0 tax liability last year and expect the same this year. It’s better to use Section 4c on the W4 to add a specific amount to be withheld from each paycheck.
If you divide $20,000 by your 26 pay periods (assuming biweekly pay) and add that amount to your W4 under ‘Additional Withholding,’ it should cover the gap. What’s stopping you?
Possible? Sure, you can stop withholding. Legal? No. Your employer is required to withhold taxes based on your W4 unless you’re genuinely exempt.
Claiming exempt is not legal in your situation. Instead, you can make quarterly estimated tax payments to cover any shortfall. If your employer withholds taxes on your bonus at a supplemental rate, adjust your estimated payments accordingly.
You can adjust your W4 to increase withholding and/or make estimated tax payments throughout the year. Either approach works to ensure you meet your tax liability.
If you’re married, your spouse’s W4 could be affecting your withholding. Mark ‘Single’ on your W4, and add $770 per pay period (if biweekly) under ‘Additional Withholding’ to cover the $20,000 shortfall. Alternatively, pay quarterly taxes for any shortfall, but you can’t claim exempt.