Withholding issues can be complicated, and with the passage of the recent tax reform legislation–most of which takes effect starting in 2018–, it’s important to make sure the right amount of tax is withheld for your personal tax situation. As a first step to reflect the tax law changes, the IRS released new withholding tables in January 2018. A revised Form W-4 was released on February 28, 2018. These updated tables were designed to produce the correct amount of tax withholding.
For taxpayers with simple tax situations, the easiest way to do check whether their withholding is correct is to use the IRS Withholding Calculator on IRS.gov, which is designed to help employees make changes based on their individual financial situation.
Using the Withholding Calculator to perform a quick “paycheck checkup” protects employees from having too little tax withheld and facing an unexpected tax bill or penalty at tax time in 2019. It can also prevent employees from having too much tax withheld. With the average refund topping $2,800, some taxpayers, of course, might prefer to have less tax withheld up front and receive more in their paychecks.
Taxpayers should keep in mind, however, that the IRS Withholding Calculator results are only as accurate as the information entered. If your circumstances change during the year, come back to the calculator to make sure your withholding is still correct.
With the new tax law changes, people with more complex tax situations such as married couples who both work, higher income earners, and who take certain tax credits or itemize might need to revise their Form W-4 completely to ensure they have the right amount of withholding taken out of their pay.
Small business owners or sole proprietors who owe self-employment tax, or individual taxpayers who need to pay the alternative minimum tax, or owe tax on unearned income from dependents, as well as people who have capital gains and dividends should contact the office and speak to a tax professional.
Using the Withholding Calculator
The Withholding Calculator asks taxpayers to estimate their 2018 income and other items that affect their taxes, including the number of children claimed for the Child Tax Credit, Earned Income Tax Credit and other items. It does not request personally-identifiable information such as name, Social Security number, address or bank account numbers, nor does the IRS save or record the information entered on the calculator. Here are the steps you need to take:
- Gather your most recent pay stub from work. Check to make sure it reflects the amount of Federal income tax that you have had withheld so far in 2018.
- Have a completed copy of your 2017 tax return handy. Information on your return can help you estimate income and other items for 2018. If you haven’t filed your 2017 tax return yet you can use a 2016 tax return; however, please remember that the new tax law made significant changes to itemized deductions.
- Use the results from the Withholding Calculator to determine if you should complete a new Form W-4 and, if so, what information to put on a new Form W-4. There is no need to complete the worksheets that accompany Form W-4 if the calculator is used.
- As a general rule, the fewer withholding allowances you enter on the Form W-4 the higher your tax withholding will be. Entering “0” or “1” on line 5 of the W-4 means more tax will be withheld. Entering a bigger number means less tax withholding, resulting in a smaller tax refund or potentially a tax bill or penalty.
If you complete a new Form W-4, you should submit it to your employer as soon as possible. With withholding occurring throughout the year, it’s better to take this step early on. If you have any questions, please call.