Nobody likes to get whacked at the end of the tax year with a higher-than-expected income tax bill or a smaller-than-expected refund, but that’s what happens when you don’t have enough money withheld from your paychecks or aren’t paying enough in estimated taxes.

The United States operates a pay-as-you-go tax system, which means you as a taxpayer are expected to pay taxes on your income as you earn it, not just at the end of the year. If you owe too much at the end of the year, the government charges you a penalty. You can think of it as interest on what you underpaid for the time you underpaid.

To avoid a nasty surprise when you’re preparing your tax return at the end of the year, review your income expectations and withholdings (and estimated taxes) at the beginning of the year and adjust as needed. This is especially important if you have any self-employment or investment income or income from other sources.

Using the IRS’s Tax Withholding Estimator

To help you determine your correct tax withholding, the Internal Revenue Service (IRS) provides an online Tax Withholding Estimator that you can use for free to determine whether you need to do one of the following:

• Complete a new Form W-4, Employee’s Withholding Allowance Certificate and submit it to your employer
• Make or modify your estimated tax payment to the IRS

Before you start, gather your income documents, including these: Continue reading… Continue reading… Continue reading…