If i claim 9 dependents on my w-2 would i get in trouble with IRS?
I heard that you can claim 9 dependent on your w-2 so you wont get taxed when you get paid, but you have to pay the IRS at the end of the year, Is that illegal? and how much would i pay at the end of the year ?
Short answer: "no".
Long answer: You fill out a W-4 (not W-2) for your employer that lists 3 things your employer uses to determine how much to withhold from your paycheck and give to the IRS on your behalf each pay period. At the end of the year when you fill out your tax form (1040), you figure out how much you should have given to the IRS all year. If your employer withheld more than necessary, the difference is refunded to you. If they withheld less, you owe the difference.
The three things you enter on the W-4 are Single or Married, number of exemptions (not dependents), and if you want extra money withheld each pay period (most people put down $0 for this last one). Ideally, if you are the only worker in the household, you would enter Single or Married depending on which one you are, and you would enter the total number of people in your household. (e.g. You and your non-working spouce and 3 kids and one non-working relative live in your home, you would enter Married with 6 exemptions.) Ideally, if you do this, you would neither owe nor get a refund when you do your tax return at the end of the year.
Why? Essentially, your employer does a mini-tax return for you each pay period and determines from that how much to withheld. Let's say you get paid $6,000 once a month, you are married, and you selected 6 exemptions. Your employer takes the 6,000 and multiplies by 12 (months in a year) and subtracts the standard deduction for a married couple (for 2005, it was $10,000) and subtracts 6 times the exemption deduction (for 2005, it was $3,200). The net result is $6,000 x 12 - 10,000 - 3,200 x 6 = $42,800. They then figure out how much tax you would owe as a married couple earning a net of $42,800 (for agrument sake, let's say the tax is $8,400). Finally, they take that "yearly tax total" and divide by 12 (month in the year) to get how much you need to withhold each month, or $700. A similar calculation is used when you get paid twice per month, every 2 weeks, or every week, except the "12" becomes 24 or 26 or 52 respectively. Since they only look at that one pay periond and multiply the amount by 12 or 24 or 26 or 52 to get your yearly income, when you work overtime or get a bonus, the amont of tax withheld can really get large because the calculation says you will make a lot of money for the year even though it may be a one pay period phenomima.
However, most people don't simply have one source of income and no credits. Remember, the calculation your employer makes assumes you are the only one making money, that you don't have gains or losses from investments like stocks or rental income, that you don't have credits like child tax credits or earned income credits, that you don't have adjustments like contributions to your IRA, and that your Schedule A "Itemized Deductions" is less than the standard amount. Therefore, when you do your tax return, you may end up owing or getting a refund. If you have a lot of credits, you may want to have a higher number of exemptions. If you have other income, you may want to lower your exemptions. If you have a lot of deductions (mortgage interest, real estate taxes, etc.) you may want to increase your exemptions. If you want a larger refund, you may want to lower your exemptions. If you want to get a smaller refund or even owe a bit, you may want to raise your exemptions.
The IRS will only "get angry" and penalize you if you owe more than a certain amount. The calculation they use to determine if you owe a penalty and how much is too complicated for this answer, but you can search for it on www.irs.gov
. Essentially, they won't penalize you unless you owe them at least $1,000, but for most people, you would have to owe even more than that. So, no, the IRS won't penalize you for selecting a certain amount of exemptions UNLESS by doing so, it causes you to owe the IRS too much money at the end of the year.
It is best to see a tax professional to determine what your exemption needs to be set to, but here are some general guidelines:
If you never have a tax liability (look for the line that says "total tax" on your tax return), and you don't expect to have one this year either (your family situation is essentially unchange from last year) you don't need to withhold anything. You should raise your exemptions until your employer does not withhold anything from your paycheck. If you get a refund every year and this year is basically the same as last year, you can increase your exemption amount to get more each paycheck and less refund.
Finally, the "exemption" amount you enter on your W-4 is NOT telling the IRS how many depends you have. This is a common misconception. It mearly tells your employer how much to withhold.
The lower your W-4 exemption, the more your employer will withhold each paycheck (you will get less money in your paycheck), and the more your refund (or the less you will owe) when you do your tax return.
The higher your W-4 exemption, the less your employer will withhold each paycheck (you will get more money in your paycheck), and the less your refund (or the more you will owe) when you do your tax return.
Good Luck! Sorry for the long answer.
2 years ago