Can you stop withholding taxes after you meet the safe harbor provision?

[AndyAndTheTuna]

I'm about to get an equity windfall which will put me above 110% withheld of last year's taxes paid. Is my understanding correct that I can stop withholding taxes from my paycheck, place the added income in an HYSA, and reconcile any possible under/overpayment of taxes come tax return time?

[FiveK]

Yes, if you already meet that particular Safe harbor then you don't need to withhold more.

[AndyAndTheTuna]

Cheers, thanks for the confirmation.

[furwut]

Also check your state situation. [Deleted]

[rob]

Well... Hold on... You have to attest that what you put on your W4 is true... so I doubt you can "stop"....

[FiveK]

Well... Hold on... You have to attest that what you put on your W4 is true... so I doubt you can "stop"....

See the flowchart at the top of Form 2210:

Complete lines 8 and 9 below. Is line 6 equal to or more than
line 9?

Yes ▶

You don’t owe a penalty. Don’t file Form 2210 unless
box E in Part II applies, then file page 1 of Form 2210.

[rob]

Well... Hold on... You have to attest that what you put on your W4 is true... so I doubt you can "stop"....

See the flowchart at the top of Form 2210:

Complete lines 8 and 9 below. Is line 6 equal to or more than
line 9?

Yes ▶

You don’t owe a penalty. Don’t file Form 2210 unless
box E in Part II applies, then file page 1 of Form 2210.

See this quote on the W4 where you have to fill out something untrue to get to zero withholding....

"Under penalties of perjury, I declare that this certificate, to the best of my knowledge and belief, is true, correct, and complete."

[FiveK]

Well... Hold on... You have to attest that what you put on your W4 is true... so I doubt you can "stop"....

See the flowchart at the top of Form 2210:

Complete lines 8 and 9 below. Is line 6 equal to or more than
line 9?

Yes ▶

You don’t owe a penalty. Don’t file Form 2210 unless
box E in Part II applies, then file page 1 of Form 2210.

See this quote on the W4 where you have to fill out something untrue to get to zero withholding....

"Under penalties of perjury, I declare that this certificate, to the best of my knowledge and belief, is true, correct, and complete."

Assuming "using the entries on this W-4 will not, to the best of my knowledge and belief, subject me to any underpayment penalty when filing" as the test for "true, correct, and complete" I would have no qualms about submitting such a W-4.

Different assumptions, such as using "I expect this W-4 to lead to exactly $0 tax due or refunded" as the test for "true, correct, and complete" would lead to different conclusions.

If there is a court case in which a taxpayer was successfully prosecuted for a W-4 perjury while at the same time having no underpayment penalty and paying all tax due by the filing deadline, that could be illuminating.

[MrDrinkingWater]

I just read through Publication 17 and Publication 505. I think a taxpayer is allowed to revise his or her Form W-4 throughout the year to try to have withholding match one's actual tax liability.

If too much or too little tax is being withheld to match one's actual tax liability, the IRS wants the taxpayer to give an employer a new Form W-4 to change the taxpayer's withholding. I think that is the bottom line.

You just have to have a reasonable basis for how you prepared your first Form W-4 and all subsequent Forms W-4 at the time you prepare each Form W-4. If you have a reasonable basis that you can explain about why you filled out the way you did, there should never be a penalty applied for how you filled out a Form W-4.

I get the point that member rob makes in what the statement above the signature line says on the Form W-4, but Publications 17 and 505 suggest that the IRS realizes that income is earned many ways and withholding may need to be adjusted in either direction as the year progresses for some taxpayers. The bar to apply a penalty to a taxpayer is set pretty high. The taxpayer just needs to have a reasonable explanation about why he or she is submitting a new or revised Form W-4.

This topic has been covered pretty well in other posts about withholding and estimated tax payments.

[Hyperchicken]

A cleaner solution would be to reduce withholding early in the year aiming at reaching safe harbor by the end of the year.

[toddthebod]

I just read through Publication 17 and Publication 505. I think a taxpayer is allowed to revise his or her Form W-4 throughout the year to try to have withholding match one's actual tax liability.

If too much or too little tax is being withheld to match one's actual tax liability, the IRS wants the taxpayer to give an employer a new Form W-4 to change the taxpayer's withholding. I think that is the bottom line.

You just have to have a reasonable basis for how you prepared your first Form W-4 and all subsequent Forms W-4 at the time you prepare each Form W-4. If you have a reasonable basis that you can explain about why you filled out the way you did, there should never be a penalty applied for how you filled out a Form W-4.

I get the point that member rob makes in what the statement above the signature line says on the Form W-4, but Publications 17 and 505 suggest that the IRS realizes that income is earned many ways and withholding may need to be adjusted in either direction as the year progresses for some taxpayers. The bar to apply a penalty to a taxpayer is set pretty high. The taxpayer just needs to have a reasonable explanation about why he or she is submitting a new or revised Form W-4.

This topic has been covered pretty well in other posts about withholding and estimated tax payments.

The first half of your response seems to go counter to the second half of your response. "I knew I met my safe harbor, so even though I knew I would owe tens of thousands of dollars in taxes at the end of the year, I chose to actively reduce my withholding" does not seem like a "reasonable basis" for how you filled out your W4, nor does it look like the taxpayer is trying to have their withholding match their "actual tax liability."

There's a whole section in pub 505 about penalties for submitting false W4s and additional penalties and "lock in letters," that imply to me that there is more to this than just meeting your safe harbor:

IRS review of your withholding. Your withholding or any claim for a complete exemption from withholding is subject to review by the IRS. Your employer may be required to send a copy of the Form W-4 to the IRS. There is a penalty for supplying false information on Form W-4. See Penalties, later.
If the IRS determines that you have overstated your withholding or can’t claim a complete exemption from withholding, the IRS will issue a notice that specifies the withholding arrangement permitted for the employee (commonly referred to as a “lock-in letter”) to both you and your employer.

Anyhow, OP, Google lock-in letters before you start trying to game the system.

[MrDrinkingWater]

I did not read AndyAndTheTuna implying that he would be owing tens of thousands of dollars in taxes at the end of the year.

I'm sorry that member todthebod didn't understand my earlier nuanced response.

If a taxpayer makes an overly huge 1st Quarter estimated tax payment or an overly huge voluntary withholding early in the year (maybe getting a huge bonus as a salaried employee, and had a huge amount of tax withheld, or perhaps taking an RMD in January, if over age 72), why wouldn't that taxpayer choose to reduce his withholding for the remainder of the year to try to match his actual year-end tax liability? If a single huge estimated tax payment was made before or on the 1st Quarter deadline, a taxpayer can choose to not make three other later estimated tax payments, if he thinks that first estimated tax payment was large enough.

It wasn't exactly clear to me what Andy's situation was, but from what Andy did write, I understood that he would meet a safe harbor and owe less than $1000 additional tax in April 2024.

[toddthebod]

I did not read AndyAndTheTuna implying that he would be owing tens of thousands of dollars in taxes at the end of the year.

I'm sorry that member todthebod didn't understand my earlier nuanced response.

If a taxpayer makes an overly huge 1st Quarter estimated tax payment or an overly huge voluntary withholding early in the year (maybe getting a huge bonus as a salaried employee, and had a huge amount of tax withheld, or perhaps taking an RMD in January, if over age 72), why wouldn't that taxpayer choose to reduce his withholding for the remainder of the year to try to match his actual year-end tax liability? If a single huge estimated tax payment was made before or on the 1st Quarter deadline, a taxpayer can choose to not make three other later estimated tax payments, if he thinks that first estimated tax payment was large enough.

It wasn't exactly clear to me what Andy's situation was, but from what Andy did write, I understood that he would meet a safe harbor and owe less than $1000 additional tax in April 2024.

I think Andy's plan was clear enough:

I'm about to get an equity windfall which will put me above 110% withheld of last year's taxes paid. Is my understanding correct that I can stop withholding taxes from my paycheck, place the added income in an HYSA, and reconcile any possible under/overpayment of taxes come tax return time?

He met the 110% safe harbor, he will continue to earn income for the remainder of the year, he will "stop withholding," hoping to earn 4%+ interest, and then reconcile come tax return time. I don't know how you can interpret that to him trying to match his tax liability for the year. Regardless, he is welcome to fill out the worksheets in Pub 505 and adjust his W4 accordingly. Or he can try to totally minimize his withholding and hope the IRS doesn't care send him a lock-in letter.

[AndyAndTheTuna]

Maybe to clarify, after my windfall I'm fairly sure that if I run the numbers through the IRS w4 withholding calculator that it will effectively tell me to reduce my paycheck withholding to little or nothing using line 3. But I'll also be checking with my CPA.