While the Tax Cuts and Jobs Act caused federal payroll tax withholding rates to automatically decrease, the law also increased the standard deduction, removed personal exemptions, increased the child tax credit, limited or discontinued certain deductions and changed the tax rates and brackets. As such, the payroll withholding employees have in place may no longer fit their revised tax situation.
The IRS recommends a paycheck checkup using the IRS’s Withholding Calculator to help determine the right amount of payroll withholding. Employers should encourage their employees to use the tax calculator at the beginning of each year and any time their tax situation changes (change in number of dependents, marital status, additional jobs, etc.)
Below is information you can provide to your employees to help them perform their own paycheck checkup.
Who is affected?
The IRS recommends that all taxpayers utilize the paycheck checkup, but it becomes more important if you:
- Are a two-income family
- Have two or more jobs at the same time or only work part of the year
- Claim credits like the child tax credit
- Have dependents age 17 or older
- Itemized deductions in 2017
- Have high income or a complex tax return
- Have a large tax refund or tax bill for 2017
What is needed?
You will need to gather your most recent pay stub for each job and your most recent income tax return. Note that the site does not request any personally identifiable information such as name or social security number.
The calculator will query on the number of jobs and dependents you have, as well as the child and dependent care credit. After adding your gross wages for the year, you will add annual amounts for pre-tax deductions via a cafeteria plan from your paycheck (e.g. health insurance, HSA, flexible spending account) and you will need to estimate your TOTAL contribution to any retirement plan, such as a 401(k). Additionally, you will need to provide info on other income that you will receive, such as unemployment, dividends and interest.
Refer to IRS Publication 505 or consult with your tax advisor if you recognize that you have a more complex tax scenario.
A few shortcomings exist with the tool:
- It is not mobile friendly.
- It does not have a “back” button – if you want to change your information, you have to start the process over.
Once you have completed the checkup, any withholding changes should be communicated to your employer by submitting a revised form W-4. Verify that you fill out the W-4 completely and correctly; include your name, address and social security number, indicate your filing status and identify the number of allowances and any additional withholding. And don’t forget to sign and date the form!