Estimating Income and Withholding

If you strive to be your own best money manager, resign yourself to doing some financial planning, including estimating income and withholding. Every minute spent planning next year’s financial activities means less time spent on finances in the coming year.

Once you’re done estimating income and withholding, as well as completing other essential financial tasks, you can put things on autopilot. Concentrate on more important things like your family and fun rather than worrying about money.

Estimating Income

Estimate your income for the rest of the year and at the end of the year for next year. You’ve got to know what you’re working with before you can start managing money.

Estimating income can be relatively easy, or harder depending on your income sources and how you’re paid. Regardless, there’s lots of good reasons for making estimating the coming year’s income a yearly habit.

Make sure to include all your income. Don’t forget about capital gains, losses, and dividends in addition to your W-2, 1099, or self-employment income.

Get out last year’s tax return and note your income from all sources. Will your income repeat, or will there be a drop-off or premium? Project that anticipated income forward.

Gross Versus Net

You’re trying to predict net income, not gross. Gross isn’t an accurate enough estimate. What exactly is the difference between your gross and net pay? Net pay is what’s left over after subtracting out federal and any state tax withholding, payroll taxes for Social Security (6.2%) and Medicare (1.45%), other state and local levies, as well as any employee benefit deductions you elected.

Estimating Withholding

Federal tax withholding is all about Uncle Sam, our loving nickname for the federal government of the USA and the IRS, wanting his tax money as you earn it rather than waiting until his due date of April 15th (in most years) to get it. More than likely federal withholding is going to be your biggest deduction when figuring net income, which is why it’s important to project it as accurately as possible.

Come April 15th following the tax year, after you’ve “done your taxes” and computed your actual tax liability, you then do a true-up with your uncle. If you overestimated what your taxes were going to be via your tax withholding, you get a tax refund. If you underestimated, you need to send extra money to Uncle Sam by the tax filing deadline. You could even be assessed an interest penalty if you violated the IRS’s estimated tax income rules by withholding too little.

Last year, how accurately did you predict your actual tax owed with your withholding? Adjust next year’s withholding per your refund or any extra payment you had to make, as well as allotting for any drop or increase in your projected income. The IRS’s tax withholding estimator may help some too.

How to Pay Your Withholding

There are a few different ways to satisfy your Uncle Sam’s lust for your future tax debt. If you had a refund coming from the previous year, you can elect to put that towards next year’s taxes. Otherwise, you’ve got to send money to Uncle Sam to cover your future tax liability. This can be done one of two ways, or a combination. It doesn’t matter how you send it, that money ends up in the same place: That special spot in the US Treasury reserved for your future tax.

W-4 Withholding

If you are an employee, you were forced into filling out a W-4 form by your employer when you were hired. This was just one of a host of paperwork chores you were more than likely required to complete before they’d let you work for them, so you might not even remember doing it.

A W-4 is a worksheet that attempts to estimate the amount of federal tax you’ll owe in the coming year. Because of changes to the tax code, at times confusing instructions, and questions you’re unable to answer on the spot, that W-4 form may have done a lousy job with that prediction.

Your employer deducts the amount of future tax calculated by the W-4 from your paycheck and sends it on your behalf to the US Treasury every time you get paid. If you have more than one income source you could have multiple withholdings going on. You can also elect to not withhold any money via the W-4 and instead send it in yourself via estimated tax payments. Again, Uncle Sam doesn’t care how it gets to him as long as you withhold enough, and the payments are on time.

Estimated Tax Payments

As an alternative to W-4 withholding or in addition to it, you can make estimated tax payments directly to Uncle Sam and the US Treasury. In normal years, the due dates are April 15, June 15, September 15, and January 15 for income earned during the previous months. If you’re self-employed, making estimated tax payments is your only option.

Download your estimated tax payment coupons and detailed instructions at ( or arrange to make electronic payments to Uncle Sam. Be sure and pay by the due dates.

Estimating Income and Withholding

Estimating income and withholding helps you drill down to what your net income is going to be for the coming year. Now that you have an accurate projection of your net income, it’s time to figure out how you’re going to spend it. What percentage are you going to dedicate to savings? I like calling this percentage of your net income your “prosperity percentage” because if you embrace my “pay yourself first” mentality, you can’t help but prosper.