Knowing how many exemptions to claim on one's W-4 form is critical, according to the National Association of Enrolled Agents, since income taxes withheld from paychecks are determined by the information completed on these forms.

"Most income taxes are ‘pay-as-you-go' taxes on income earned or received during the year, so employers must withhold taxes from each paycheck," explains Carol Thompson, EA, Chair of NAEA's Public Information Committee. "Employers determine how much money to withhold from paychecks by the information employees provide on their W-4 forms."

Since many people will be affected by changes in their lives, or by new tax credits in the current tax year, NAEA advises employees to review their W-4 forms and adjust them accordingly.

(Although W-4 forms are provided to employees when they're hired for a new job, the forms can be revised and updated at any time.)

"People who hold more than one job at a time, who have working spouses, or have income that isn't subject to withholding taxes may be having too little tax withheld," Thompson says.

"Those, however, who got a big refund from their prior year taxes - and their income, adjustments, deductions and credits will remain the same this year - probably had too much tax withheld."

Enrolled Agents, the only professional tax practitioners licensed by the federal government to represent taxpayers before all administrative levels of the Internal Revenue Service, recommend that neither too much nor too little tax be withheld on employee paychecks.

"If too little tax is withheld, you'll owe tax at the end of the year ... and you may have to pay interest and a penalty," says Thompson. "If too much tax is withheld, you'll lose the use of that money until you receive a refund. Receiving a refund after having taxes withheld throughout the year is like loaning money to the Internal Revenue Service-and not collecting any interest on it!"

Enrolled Agents say that the earlier in the year employees check their withholding, the more likely they'll have the correct amount of taxes withheld.

"Now that your 1998 taxes are prepared, you'll have a better guide as to whether too little, too much, or about the right amount is being withheld. "But check your withholding during the year if you have changes in your financial or personal situation," Thompson suggests.

Two IRS publications - Publication #505 and Publication #919 - contain worksheets useful for calculating correct withholding amounts.

Taxpayers claiming allowances on their W-4s that reduce the amount of taxes withheld and have no reasonable basis for those allowances may be subject to financial penalties, NAEA's Thompson warns. And for willfully supplying fraudulent information on one's W-4 form - or deliberately failing to provide information that would increase the amount withheld in attempt to reduce or eliminate the proper withholding of taxes - criminal penalties can be imposed.

"With all of the recent changes in the tax code, it's more important than even to seek qualified help in addressing your tax situation," Thompson concludes.

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