Exempt yourself at your own peril.

Josh Nowack

March 25, 2015

In this world, nothing can be for certain except death and taxes.  Oh Uncle Ben - if you only knew!

Wage earners have little choice in terms of withholdings.  Their employer, in accordance with federal and state law, in conjunction with how you've completed Form W-4, will withhold and make estimated tax payments on your behalf throughout the year.  It's prety straight forward.  The payroll withholding tables are designed to take a little extra so that, assuming your situation is fairly normal and you follow the instructions on Form W-4, you will get yourself a $3,000 refund.

Enter two situations which have nearly identical outcomes.  The first of which is the exempt wage earner.  For a variety of reasons, a wage earner will put EXEMPT on Form W-4.  This means that they will direct their employer to not withhold any money from their paychecks.  Now, I suppose there are dire finanical conditions which could warrant such a move.  However, as a practical matter, once this maneuver is executed, there is no catching up by withholding alter on in the year.  

The variant is the self employed person who worked the entire year, without withholding and then comes to realize (painfully) that they are not only subject to income tax, but also self-employment tax.  Having skipped out on making estimated payments, thinking that they don't make a lot of money, they too are in for a rude awakening.  Now while there are businesses with cycles that make estimated payments challenging, making no payments is quite similar to exempting a wage earners paycheck.

The end result is that you will be writing a check for a shocking amount come April.  You may attempt to blame me - your accountant - for not being aggressive enough on deductions.  You may attempt to blame me for a lack of knowledge of tax rules.  You may acost me and insist that in my bag of tricks, I have some Harry Potter wand to prepare a tax return that shows that despite not withholding or making estimated payments, that somehow, you are getting money back.  Now there are some select cases where this can conveivably happen (earned income credit).  But, by and large, this is just not the case.  This is not my fault.  So if you are self employed and don't have inventory - please set aside at least 20% of your revenues for tax purposes.  If you are a wage earner - prepare Form W-4 sincerely.  Let's avoid that awkward moment in March or April when we realize what happened and you look at me in disbelief.  Let's avoid the part where you ask me to redo, reprepare, "get aggressive", stand on my head or otherwise make it up to get you a "better number."  Rather, let's be proactive - follow those darn rules and preserve our relationship.

Thanks and happy tax season!


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