When was the last time you had to update or fill out your W4 form at work? If it has been awhile, you might not have the right tax withholdings on your paycheck, which could leave you with a higher tax bill come tax day. You might also be withholding too much money, which means you could be taking home more money with each paycheck. With the new tax reform bill in effect and Tax Day just around the corner, now is the perfect time to complete what the IRS is calling a “Paycheck Checkup.”
Why You Should Do a Checkup
Why should you worry about completing a paycheck checkup this year if you have never done this before? A big reason is that the 2017 tax reform bill has made one of the biggest changes to the tax code in decades. This will impact almost all taxpayers in some form or fashion. Therefore, you want to make sure that you set yourself up correctly under this new tax law.
However, it is always a good idea to do a paycheck checkup at the start of every year. When life changes happen, the last thing on your mind might be your taxes. This can mean that you forget to change your dependents or your filing status until you are filling out your tax return, leaving you with a tax bill. Perhaps you now have a side job for which you do not withhold taxes, so you want to have more money taken out of your paycheck to reduce your taxes come tax day. There are many changes that could impact your taxes, so by looking at it each year, you will keep up.
When you have the wrong withholdings, you are at risk of a huge tax bill. This could make it hard for you to pay your taxes on time, leaving you with penalties and interest that only increases the amount you owe. It is much easier to pay your taxes over time with each paycheck rather than coming up with the money at once. If you underpay your taxes, you might also have to pay a penalty, even if you do pay on time.
On the other hand, many people like to maximize their withholdings so they get a bigger tax refund. This might work well for you, especially if this is the only way that you are able to save money throughout the year. However, just imagine if you had a bit more money with each paycheck rather than a massive payout at once. This might help you to breathe a bit better from paycheck to paycheck, and there are other ways to ensure you put the money into savings, even if you just want to save up for a trip or big item purchase.
Whether you currently have selected too few withholdings or too many, there are benefits to getting it correct. If you have fairly simple taxes, even when you have the correct withholdings, you most like will still get at least a bit of a refund, and you will not have to worry about a bill.
Most Likely Impacted
The IRS has selected a few groups who might benefit the most from a paycheck checkup. These include:
- Families with two or more sources of income
- Those who typically itemize deductions
- Those with complex tax returns
- Those in higher tax brackets
- People who have more than one job
- Seasonal employees
- Those who have children and claim associated credits such as the Child Tax Credit
- Those who claim adults dependents
- Anyone who received an excessive bill or refund with their 2017 taxes
This applies to those who are designated as employees in their job, so they have their taxes withheld from paycheck to paycheck. Those who own a business or are contract employees should still review their status but it will impact their estimated taxes rather than any type of withholding.
What to Do
There are a few different ways to complete a paycheck checkup. The IRS has tools on their website, including a Withholding Calculator that helps taxpayers decide what to select on their W4. This will take you through the different areas of the W4 form to help you fill it out. There are also other resources on the page to help explain the process. You do not have to use the IRS resources, especially if you already know that you have had a life change that will change your withholdings. You can just simply change your W4.
To make any changes, go to person or department in charge of payroll, which is often the HR department. Request a new W4 to complete. The earlier you complete this, the earlier the impact on your current tax year. This will help to reduce your tax bill come next April, or it might help you to have a bigger paycheck for the rest of this year.
Those who already have tax debt they cannot afford to pay, whether due to incorrect withholdings or other circumstances, do have actions they can take. With the Fresh Start Initiative, you can negotiate a tax settlement that helps you to pay down your tax debt in a way that fits your situation so you avoid a lien or wage garnishment. Call Fidelity Tax Relief at 877-372-2520 and talk with one of our tax professionals about your situation to see how we can help you.