Withholdings - Life Events Affect Taxes

Now is a Good Time to Review All Withholdings

Just about any life event—big or small—can affect an employee’s income tax withholdings. It’s best to adjust withholdings as soon as a life-event occurs, but taxes may be the last thing to come to mind when getting married or welcoming a new child. To promote accurate withholdings, remind employees to report any life events that could impact their tax status. Clergy can also benefit from an annual withholdings review. A mid-year check can help keep a minister’s estimated taxes and housing expenses on track. Events that can trigger the need to adjust withholding amounts include:

  • Change in marital status
  • Change to number of exemptions
  • Change in benefits
  • Added or left a job
  • Moved to a different county or state
  • Qualified for tax exemption based upon pay
  • Became or will become a student
  • Used a non-accountable plan for business expenses
  • Collected disability
  • Earned non-wage income, such as dividends, alimony, or interest
  • Reclassified from independent contractor to employee

As an added measure, encourage all ministry employees to take an annual look at their year-to-date paycheck summary, and conduct an income tax withholding status check. The Withholding Calculator from the Internal Revenue Service can help determine proper withholding amounts, so that mid-year adjustments can be made. Self-employed workers, like some pastors, who make quarterly tax payments may achieve estimates that are more accurate by following these instructions.

Too Much or Too Little?

Failure to withhold the proper amount could result in a tax shock next year. An employee could receive a less-than-anticipated refund or owe taxes. Too much money withheld may mean a bigger refund, but withholding more than required could have an impact on month-to-month cash flow.

A New Form W-4 is Required

If employees want to make changes to their withholdings or estimated tax payments, they should file a new Form W-4 with the ministry’s payroll administrator. Do not allow employees simply to give a “verbal” notice of change.

The information in this article is intended to be helpful, but it does not constitute legal advice and is not a substitute for the advice from a licensed attorney in your area. We strongly encourage you to regularly consult with a local attorney as part of your risk management program.

You could claim up to $33,000/employee with the
Employee Retention Credit.

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