Here is the procedure to calculate your withholding allowances very accurately. It is a long and involved process. To start off, you will need the following items.
A. IRS Publication 15, 2010 edition, Pages 37 and 39. Go to IRS.gov, download the pdf and print those two pages.
B. Copy of you most recent pay stub. It needs to show both current and year-to-date figres, as well as the number of exmptions claimed.
C. An estimate of what your 2010 tax will be.
D. Blank W-4 Forms (you can wait until you arer done, and then fill them in on irs.gov and print them after filled in to turn in to your employers).
1. Take the YTD withholding amounts.
2. Add to that the additional amount that woud be withheld until the time you turn in revised W-4s and they get processed into the payroll system.
3. Take the sum of 1. and 2. and subtract that from C. above. This is the amount you need to have withheld for the remainder of the year.
4. Divide the amount from 3. by the number of pay dates remaining in the year. This is the amount of withholding you will need per pay period untl the end of the year.
5. Look at the tables on Page 39 and select the table which applies to your status and pay frequency. Look at the table on page 37 and select the amount which applies to your pay frequency.
6. Look at your pay stub in the pay period (not YTD) columns.
6A. If it divides pre-tax and post-tax deductions you are in luck. You need to either take the gross amount and subtact the pre-tax deduction, or look for a taxable amount and select that.
6B. If it does not divide them out, you need to subtract any 401(k), HAS, pre-tax Health Insurance, or any other tax-deferred deductions from your gross pay. This will give you the taxable amount.
7. Now the test. Take your taxable income. Subtract the number of exemptions claimed, using the value from the table on Page 37. Look at the line in the table you are using and calculate the amount of withholding. This calculated amount should be within a couple of dollars on either side of wht they are actually taking out. If it is not very close try to ascertain what you did wrong.
(Note, if married, you can use either the married or single table for withholding computatiuons.)
(Additional note, if married. for the following, you can split the withholding any way you like as long as the total is what you got in Step 4 above.)
8. Now that you have a target withholding amount, you need to do a reverse computation using the table selected on Page 39 to see the dollar amount of gross pay which will give you the withholding you want.
9. Subtract the dollar amount computed in Step 8 from the Taxable Gross in Step 6. This is the value of the withholding allowances you need.
10. Subtract the result in step 9 from the amount in the table on Page 37 to get the number of allowances. Select the smaller number so that you will still be overwithheld.
11. Go to the W-4 and on the bottom of the form (which you turn in) put the result from Step 10 on line 5. Print the form, sign it, and turn it in.
It should be possible to do something similar for Massachussetts, but I don't know the source of their tax tables or how their withholding is computed.
Mass. isn't even in the top 20 for overall tax burden.
