J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

26.1 Withholdings Should Cover Estimated Tax

In fixing the rate of withholding on your wages, pay attention to the tests for determining whether sufficient income taxes have been withheld from your pay. A penalty will apply if your wage withholdings plus estimated tax payments (including prior year overpayments credited to current estimated tax) do not equal the lesser of 90% of your current tax liability or the required percentage of the prior year’s tax (27.1).

Taxes are withheld from payments made to you for services that you perform as an employee, subject to certain exceptions (26.2). By filing Form W-4, you claim allowances for yourself, your spouse, and dependents. The number of allowances claimed will either decrease or increase the amount of withholding. On Form W-4, you also may claim withholding allowances for itemized deductions and tax credits such as the child tax credit and the child and dependent care credit.

If you need to increase your withholding, such as to cover investment or self-employment income, you can choose not to claim all of the allowances allowed on Form W-4. You can also direct your employer on Form W-4 to withhold an additional flat amount from each paycheck.

You can change your withholdings, either increasing or decreasing them, if your financial or family situation changes (26.5).