Have you looked at the amount you are withholding from your paycheck? You may have noticed an increase in your take home pay this year. Under the new Tax Cuts & Jobs Act, the standard deduction has doubled, personal exemptions have been eliminated and tax rates have dropped. Sounds good, right? The updated 2018 W-4 was not released until March of 2018, so there’s a good chance that a few months of income was still based from the pre-2018 tax law. This resulted in employers inadvertently either under or over withholding taxes depending on your tax situation.
What’s a W-4?
A W-4 also known as Employee’s Withholding Allowance Certificate is everyone least favorite form to complete when first starting a job. It includes a series of worksheets you can use to calculate the appropriate number of allowances to claim. This tells employer know how much federal tax you should have withheld from your paycheck each pay period depending on your filing status (single, married, separate) and the number of allowances or also known as exemptions or dependents that you claim.
What exactly do these changes mean?
The US Treasury (IRS) has changed the withholding tables and as a result, you probably have already seen a change in your paycheck in retrospect to last year. However, make sure to take another look at your withholding to ensure you are on the right path. You do not want to end up owing the IRS money at the end of the year. You also do not want to pay too much and have a large refund at the end of the year, especially if you’re on a tight budget. If you are self employed or have a business (i.e passthrough income) you may want to revise your estimated tax payment. The fourth quarter final estimated tax payment is due on January 15, 2019. This will be your last chance to protect yourself from a potential tax penalty.
Did you say tax penalty?
Yes, you read that right. It’s actually penalties plus interest. If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. This is also known as the 90/100 rule. The IRS wants you to pay the smaller of 90% of the tax for the current year or 100% of the tax shown on the return for the prior year. There are special rules for farmers and fishermen, certain household employers and certain higher income taxpayers.
How do I find the right amount to withhold?
The IRS’ Withholding Calculator is a great place to start. By answering a few questions, this resource will give you a ballpark amount for your withholding. Furthermore, consulting with your accountant about your situation will enable you to make the best decision possible.
Final Thoughts from KB
It’s a great time to consult with your CPA or tax advisor as we enter the final quarter of 2018. Every client is so unique in his or her own way that the only way to come to a clear answer is to fully analyze your situation. If you need help figuring the correct amount of tax to be withheld, we have over thirty-five years of experience helping our clients stay on track and up to date.
Keith Boyer, Certified Public Accountant