If you filed your 2025 return on time, you may now have valuable information that can help you fine-tune your 2026 withholding. A big refund indicates you withheld too much in 2025.
Continue readingReview Your Withholding After Filing
Required Withholding for Supplemental Pay
Employers are required to withhold federal tax from supplemental wages paid to employees. These include bonuses, commissions, reimbursements (so long as you don’t have an accountable plan), severance, cash prizes, retroactive raises and taxable fringe benefits.
Suppose you pay a bonus separately from regular wages. In that case, you generally must either 1) withhold 22% or 2) add the supplemental wage to the employee’s regular wages and withhold at the ordinary rate.
Supplemental wages paid with regular wages are subject to ordinary withholding. (For supplemental wage payments over $1 million, tax on the excess must be withheld at the highest rate, currently 37%.)
If you have additional questions or are interested in tax services, feel free to contact our office.
408-252-1800
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To Get an “Early” Refund, Adjust Your Withholding
If you received a large refund this year, you may want to adjust your withholding. Each year, millions of taxpayers claim an income tax refund. To be sure, receiving a payment from the IRS for a few thousand dollars can be a pleasant influx of cash. But it means you were essentially giving the government an interest-free loan for close to a year, which isn’t the best use of your money.
Fortunately, there’s a way to begin collecting your 2024 refund now: You can review the amounts you’re having withheld — and any estimated tax payments you’re making — and adjust them to keep more money in your pocket during the year.
Choosing to Adjust
It’s particularly important to check your withholding and/or estimated tax payments if you have:
- Received an especially large 2023 refund,
- Gotten married, divorced or added a dependent,
- Bought a home, or
- Started or lost a job.
Withholding or estimated tax payment changes might also be warranted if your investment income has changed significantly.
Making a Change
You can modify your withholding at any time during the year, or even more than once a year. To do so, simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. For estimated tax payments, you can adjust each time quarterly payments are due.
While reducing your withholding or estimated tax payments will put more money in your pocket now, you also need to be careful that you don’t reduce them too much. If you don’t pay enough tax throughout the year on a timely basis, you could end up owing interest and penalties when you file your return, even if you pay your outstanding tax liability by the deadline in April 2025.
Getting Help
One reason to consider adjusting your withholding is the passage of any new tax legislation. For example, several years ago when the Tax Cuts and Jobs Act was enacted, the IRS needed to revise withholding tables to account for the increased standard deductions, suspension of personal exemptions, and changes in tax rates and brackets. If you’d like help determining your withholding or estimated tax payments for the rest of the year, please contact the office.
408-252-1800
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Is Disability Income Taxable?
If you may be eligible for disability income should you become disabled, it’s important to know whether that income will be taxable. As is often the case with tax questions, the answer is “it depends.”
Key Factor
The key factor is who paid it. If your employer will directly pay the disability income to you, it will be taxable to you as ordinary salary and wages would be. Taxable benefits are also subject to federal income tax withholding, though, depending on the disability plan, disability benefits sometimes aren’t subject to Social Security tax.
Frequently, the payments aren’t made by an employer but by an insurer under a policy providing disability coverage or under an arrangement having the effect of accident or health insurance. In such cases, the tax treatment depends on who paid for the coverage. If your employer paid for it, the disability income will be taxed to you, as if paid directly to you by the employer. But if you paid for the policy, the payments you receive under it won’t be taxable.
Even if your employer arranges for the coverage (in other words, it’s a policy made available to you at work), the benefits won’t be taxed to you as long as you paid the premiums. For these purposes, if the premiums were paid by your employer but the amount paid was included as part of your taxable income from work, the premiums will also be treated as paid by you and the benefits won’t be taxable.
2 Examples
For simplicity, let’s say your salary is $1,000 a week ($52,000 a year). Under a disability insurance arrangement made available to you by your employer, $10 a week ($520 for the year) is paid on your behalf by your employer to an insurance company. You include $52,520 in income as your wages for the year: the $52,000 paid to you plus the $520 in disability insurance premiums. In this case, the insurance is treated as paid for by you. If you become disabled and receive benefits, they won’t be taxable income to you.
Now, let’s look at an example with the same facts as above, except that the amount paid for the insurance coverage qualifies as excludable under the rules for employer-provided health and accident plans. In this case, you include only $52,000 in income as your wages for the year because the insurance is treated as paid for by your employer. So, if you become disabled and receive benefits, they will be taxable income to you.
Note: There are special rules in the case of a permanent loss (or loss of the use) of a part or function of the body, or a permanent disfigurement.
How Much Coverage Is Needed
In deciding how much disability coverage you need to protect yourself and your family, take tax treatment into consideration. If you’re buying the policy, you need to replace only your after-tax, “take-home” income because your benefits won’t be taxed. On the other hand, if your employer pays for the benefit, you’ll lose a percentage to taxes.
If your current coverage is insufficient, you may wish to supplement an employer benefit with a policy you take out personally.
Any Questions?
This discussion doesn’t cover the tax treatment of Social Security disability benefits, which may be taxed under different rules. Contact the office to discuss this further or if you have questions about regular disability income.
(408) 252-1800
Tax Withholding for Seasonal and Part-Time Employees
Many businesses hire part-time or full-time workers, especially in the summer. The IRS classifies these employees as seasonal workers, defined as employees performing labor or services on a seasonal basis (i.e., six months or less). Examples of this kind of work include retail workers employed exclusively during holiday seasons, sports events, or during the harvest or commercial fishing season.
Part-time and seasonal employees are subject to the same tax withholding rules that apply to other employees and all taxpayers should fill out a W-4 when starting a new job. Employers use this form to determine the amount of tax to be withheld from your paycheck. Taxpayers (including students) with multiple summer jobs will want to ensure all their employers withhold adequate taxes to cover their total income tax liability.
Changes To Withholding Under Tax Reform
The Tax Cuts and Jobs Act changed the tax law in 2018, and included increasing the standard deduction, eliminating personal exemptions, increasing the child tax credit, limiting or discontinuing certain deductions, and changing the tax rates and brackets. Taxpayers returning to the workforce, working part-time, or with seasonal jobs, may not be aware of the changes in tax law that could affect their paycheck.
If you’ve recently started a part-time seasonal job, now is an excellent time to perform a “paycheck check-up” using the Withholding Calculator, a special tool on the IRS website that can help taxpayers with part-year employment estimate their income, credits, adjustments, and deductions more accurately. It also checks to see whether a taxpayer is having the correct amount of tax withheld for their financial situation.
Using the Withholding Calculator
- First, the calculator asks about a taxpayer’s employment dates and accounts for a part-year employee’s shorter employment rather than assuming that their weekly tax withholding amount would be applied to a full year.
- Next, the calculator makes recommendations for part-year employees accordingly. If a taxpayer has more than one part-year job, the Withholding Calculator can also account for this.
Taxpayers should have a completed prior-year tax return and need their most recent pay stub before using the Withholding Calculator.
Calculator results depend on the accuracy of information entered. If a taxpayer’s circumstances change during the year, they should return to the calculator to check whether they should adjust their withholding. For taxpayers working for only part of the year, it’s best to do a “paycheck check-up” early in their employment period so their tax withholding is most accurate.
The Withholding Calculator does not request personally identifiable information, such as name, Social Security number, address, or bank account numbers. The IRS does not save or record the information entered on the calculator. As always, taxpayers should watch out for tax scams, especially via email or phone, and be alert to cybercriminals impersonating the IRS. Remember, the IRS does not send emails about the calculator or the information entered.
If You Need To Adjust Your Withholding
If the calculator results indicate a change in withholding amount, the employee should complete a new Form W-4 and submit it to their employer as soon as possible. Employees with a change in personal circumstances that reduces the number of withholding allowances should submit a new Form W-4 with corrected withholding allowances to their employer within ten days of the change.
As a seasonal or part-time worker, you may not be required to file a federal or state return if the wages you earn at a part-time or seasonal job are less than the standard deduction; however, if you work more than one job, you may end up owing tax.
As you can see, seasonal and part-time workers have unique tax situations. If you have any questions about your tax situation, don’t hesitate to call the office today.
San Jose: (408) 252-1800
Watsonville: (831) 726-8500