Considering recent tax law changes, the Internal Revenue Service (IRS) encourages taxpayers to conduct a "paycheck checkup" and adjust tax obligations accordingly.
What is a paycheck checkup? This term refers to a review of one's paycheck to check and adjust the withholding status as needed.
Why do I need to review this information? The Tax Cuts and Jobs Act (TCJA) led to a number of changes to tax law. These changes will impact most employees. Examples of applicable changes include the increased standard deduction as well as changing tax rates and brackets.
A failure to review withholding status and make adjustments now could lead to an unexpected tax bill at the end of the tax year.
How do I conduct a paycheck checkup? The IRS recommends use of a Withholding Calculator to identify the correct tax withholding. The calculator takes projected 2018 income values and other items that will impact the tax filings and provides a new, estimated withholding.
Before beginning the process, taxpayers should gather their most recent pay stubs and income tax returns. These documents should provide the information needed to use the Withholding Calculator.
What if I need to make a change? Taxpayers that need to adjust their withholding status can complete a new Form W-4 with their employer. This can be done either on a tangible, hardcopy form or online.
What happens if I do not adjust my withholding status? One of two things could happen: you overpay or underpay your tax obligations this year. An overpayment means the money stays with the IRS all year and you do not have the money to invest and use with each paycheck. An underpayment can result in a tax penalty. The penalty generally applies to taxpayers that pay less than 90 percent of their tax obligations for the tax year in question. Completion of the paycheck checkup can better ensure your tax withholdings are in line with your true tax obligations for this tax year.