Memo – Married? Maybe You Should Be Single!

No, this isn’t marriage counseling! This memo relates to the status that you selected on your W-4 forms with your current employer.

The crux of this memo is that if both spouses are working, claiming Married on a W4 could leave you under-withheld for the year.

A W4 form is completed by an employee just as they are starting a new job. The information you include on this form is used to calculate your federal and state income withholding on your earnings.

I present here an example W4 form. You will see that you have three possible statuses to select. Single, Married or Married but withhold at the higher single rate.

It is logical that many of you who are married, want to check the Married box. Now if you and your spouse both are working, this could leave you in a position of not having enough withholding at the end of the year.

I will explain that, but first let me back up a bit, and explain how payroll tax deductions actually work.

When you are paid, the payroll tax systems are attempting to withhold enough tax, not too much, and not too little based on the status you selected.

So, let’s say you selected Married, with two exemptions, and you make $1,000 per month. The payroll tax system will extrapolate that $1,000 to an annual gross income of $12,000. Then, based on your settings which are Married with two exemptions in this case, it will calculate the estimated tax you will have on your form 1040, and then divide that by 12, and withhold that much tax from that paycheck.

This works the same for however often you are paid, weekly, bi-weekly, etc. that doesn’t matter.

Now back to why you may want to be Single if you are Married.

The status of Married on the w4 form assumes that you are the only person that is working in your household. So let’s see how that might play out.

In our first scenario, Spouse #1 earns $250,000 and Spouse #2 does not work. Spouse #1 in this case selected Married as their status.

Applying my last explanation, the payroll tax tables would work well.

I am showing the current tax brackets to further explain the possible problem.

Rate Individuals Married Filing Jointly
10% Up to $19,050
12% $19,051 to $77,400
22% $77,401 to $165,000
24% $165,001 to $315,000
32% $315,001 to $400,000
35% $400,001 to $600,000
37% $600,000

In our example, a married couple making a total of $250,000, would be in a maximum tax bracket of 24%.

But if both spouses are working, and the total household income will be above $250,000, that leaves some of their taxable income in brackets higher than the payroll tax tables are withholding for.

Let’s say we have a husband and a wife both making $250,000 each per year on their W2. So, they’re combined marital income is $500,000. If they both select Married on their W-4 form, then the way the payroll tax tables work they’re withholding will only be based on extrapolating out $250,000 for a married couple and what that tax might be at the end of the year.

Again, looking at the tax brackets, part of their $500,000 combined income would be taxed in brackets higher than 24% at the end of the year.

So we can see there will be an under-withholding problem.

So if both the husband and wife make $250,000 and both only put Married as their status then, their payroll systems would never withhold income tax at anything higher than 24%.

At year end, they most likely owe taxes to the IRS.

So the advice is that even if you are Married but you and your spouse both are working please choose to be Single!

(At least on your W4 forms)    

If you have a question about the settings on your W-4 at work, I urge you to reach out to me immediately.

My firm will analyze your current earnings and withholdings and do a projection for the remainder of 2019 to make sure your income tax withholdings will be adequate for the remainder of the year and you will not be surprised at tax time next year.