As you get your paperwork together to file your taxes, you might have questions about tax withholding. This is a common topic that comes up this time of year, and you might be wondering if you’re able to ask your company to withhold additional money on your income. Even though it seems like a straightforward yes or no answer, there’s some nuance to consider. Our team at Founder’s CPA has compiled some helpful information for you to keep in mind on this topic. As always, should you have additional questions, we’re here to help.
Overwithholding overview
Overwithholding is a generic term that refers to an excess amount of tax being deducted from an employee paycheck or a retirement plan over the course of a year. If there’s an overwithheld amount, it’s refunded to the taxpayer once they’ve filed their tax return.
Why do some employees request additional withholding?
Companies collect taxes via tax withholding, but the amount withheld is solely an estimate of each employee’s tax liability. For example, an employee’s actual tax liability if they made purchases of stock as a part of their company’s equity incentive plan can be significantly more than the flat rate that’s applied to supplemental payments. If companies fail to withhold the right amount, the employee might face tax penalties.
Are companies allowed to request additional withholding on stock plan transactions?
It depends; the IRS allows employees to request additional withholding on stock plans transactions only if they’re received $1 million or less in supplemental payments during the year. Companies also need to agree to calculate their withholding using Form W-4 as opposed to using the optional flat rate that applies to supplemental payments. This can be a big undertaking for companies, taking up a lot of time.
Why wouldn’t the IRS want more withholding?
The IRS might be worried that employees will request additional withholding on their supplemental payments to find a way around having the right amount of taxes held on their regular income. In other words, the IRS doesn’t want employees purposely filling out a W-4 that results in insufficient withholding on their regular wages and making up for it through their stock plan transactions.
Are there penalties to the company for over withholding?
There are state laws in place that govern how much a company is allowed to deduct from an employee’s paycheck. If a company oversteps this limit, they could have a liability to any impacted employees.
Navigating tax withholding with Founder’s CPA
If you have additional questions about tax withholding or you’re interested in learning more about this topic, our team at Founder’s CPA is here to assist you. Although we’re located in the West Loop neighborhood of Chicago, we’re proud to work with clients across the country! Take advantage of our free 15-minute consultations to get started.
