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It’s Paycheck Checkup Time!
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Why You Need a Paycheck Checkup
Some big—and some smaller—tax changes were made earlier this year, which will affect the amount of money that should be withheld from your paycheck throughout 2018. Changes include an increase in the standard deduction, removed personal exemptions, increases to the child tax credit, changes to tax rates and brackets, and the discontinuation of certain deductions. A change in personal circumstances also necessitates a paycheck checkup, changes like divorce, starting a second job, or a child no longer being a dependent.
A paycheck checkup gives you the opportunity to make sure the correct amount of revised federal taxes is being withheld from your paycheck. If too much is being withheld, you are overpaying and are missing out on being able to use that money for investing or saving; if you are not withholding enough, you will be in for an unpleasant surprise in 2019 when you end up owing the IRS possibly thousands of dollars.
To reduce the chances of overpaying or underpaying on certain federal taxes, it’s wise to estimate your 2018 federal tax liability with all recent tax changes considered. If there is a shortfall (i.e. you will owe the government), you can change your W-4 forms now to start withholding the correct amount and you can begin saving for the amount you know you will owe at the start of next year. If you are overpaying, you will also change your W-4 to keep more money from your paycheck for the rest of year and to better estimate your tax refund in 2019.
What to Do
If you are ready to conduct your paycheck checkup, you will need your most recent paystub, W-2 form, and information from your 2017 tax return. Your goal is to have your 2018 withholdings match your actual tax obligation (what you owe the IRS).
Start by going to irs.gov and searching for “Tax Withholding Calculator.” You can use this to review and change your W-4 (also called an Employee’s Withholding Allowance Certificate) for 2018. Follow the prompts of the calculator and fill in the necessary fields with information from your paystub, W-2, and 2017 tax return.
Your summary and results will recommend changes to make on your 2018 W-4. If you do make any changes, submit your updated W-4 to your employer as soon as possible.
The IRS has other tools and information to help you understand and navigate tax changes that might affect you, including tax tips, a YouTube video series, and more. Visit irs.gov/tax-reform to take advantage of these tools.