Risks of Delaying on the New W-4

QUESTION: If I decide to wait until the October deadline before filling out the new W-4 tax withholding form, do I run any risk other than having to pay the IRS a lot of money come the following April?--W. L.

ANSWER: You run the risk of a $500 fine, interest on the amount of money you were required to pay in throughout the year but didn’t, and even criminal penalties if the Internal Revenue Service should decide that you flagrantly broke the law.

Why does the IRS care so much when you pay your federal income taxes, so long as you do pay them by the April 15 filing deadline? The nation’s Treasury would be even lower on funds than it already is if every taxpayer postponed payment until the last minute.

To guard against such taxpayer procrastination, the IRS requires that at least 90% of the tax you will owe the federal government for the year be paid before the calendar year ends--either through paycheck deductions or through quarterly tax payments.

Since a lot of taxpayers don’t know precisely how much money they will make in a year, and thus have no way of calculating the year’s tax bill, the government provides an out: Pay in at least as much tax through paycheck withholding as you did the year before and there will be no penalty.

But even that route is paved with uncertainty this year. The reason: tax reform. The changes resulting from the new tax law are so sweeping that many of the nation’s 100 million taxpayers have little idea whether they will owe considerably less tax than before, substantially more or something in between. Hence, the requirement: Every taxpayer must complete and file a new W-4 form with his or her employer by Oct. 1.

Even so, there is nothing preventing taxpayers from waiting until Oct. 1, proceeding in the interim on the assumption that they are safe from government penalty as long as they pay before Dec. 31 at least as much as their 1985 tax bill. The big drawback to this plan is that those who guess wrong and owe much more than they expected will have to come up with a big chunk of cash before their tax return is due.

Let’s say you follow your instincts and wait until the filing deadline before completing one of the new, complicated W-4 forms. (The actual W-4 form is the same length as last year’s--less than half a page. But the accompanying work sheet that helps taxpayers fill out the W-4 is four times as long as before and so complex that Treasury Secretary James A. Baker III recently ordered the IRS to explore ways to revise it. It isn’t yet clear, however, whether there will be yet another new form available to taxpayers before the Oct. 1 deadline. So, the best advice might be to ignore the Treasury’s order in deciding when you should file a new W-4.)

There’s no harm at all in waiting if it turns out that you owe a lot less tax under tax reform than you did for 1986 and your withholding throughout 1987 has been adequate or even more generous than necessary. The IRS, it should go without saying, won’t penalize you for overpaying your taxes.

But the tax laws have been so greatly altered that it could just as easily turn out that you owe far more tax money to the government than you will pay by Dec. 31 at your current withholding rate. If you don’t want to dish out a large sum of cash when you file your return, or if you would risk a big penalty by waiting, then under this scenario you would have to have very large sums of money withheld from your paychecks between Oct. 1 and Dec. 31 to make up the difference.

For those readers not familiar with the W-4 filing procedure, the forms go to your employer--not to the IRS. But if you claim more than 10 withholding allowances (you get one for yourself, one for any of your dependents not otherwise claimed on a W-4 and others for such things as itemized deductions and tax credits), your employer has no choice but to send the form to the IRS for inspection, even if it turns out that you are entitled to claim as many as you did.

Even if you struggle through the work sheet, weighing everything the government advises, there is still a possibility that your withholding won’t cover all of your 1987 tax liability. This might happen if both you and your spouse work--because there is no longer a tax allowance for two-worker families. Taxpayers who hold down more than one job or have substantial income from sources other than wages also are likely candidates for owing more taxes than their withholding covers.