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Tax Witholding: How To Get It Right

By Peoples Tax | April 9, 2019
Posted in: Individual Tax

Peoples Tax urges everyone to do a Paycheck Checkup early in 2019, even if you did one in 2018.

As you may know, the federal income tax is a pay-as-you-go tax. You pay tax as you earn or receive income during the year. This year, your tax refund or amount owed may have been a surprise to you. Did you know you can avoid this surprise at tax time by checking your withholding amount? Peoples Tax urges everyone to do a Paycheck Checkup early in 2019, even if you did one in 2018. This includes anyone who receives a pension or annuity. Here’s what you need to know about withholding and why checking it is important. 

Understand tax withholding

Your employer generally withholds income tax from your paycheck and pays it to the IRS on your behalf. Wages paid, along with any amounts withheld, are reflected on the Form W-2, Wage and Tax Statement, you receive at the end of the year.

How withholding is determined

The amount withheld depends on:

  • The amount of income earned and
  • Three types of information you give to your employer on Form W–4, Employee’s Withholding Allowance Certificate
    • Filing status: Either the single rate or the lower married rate.
  • Number of withholding allowances claimed: Each allowance claimed reduces the amount withheld.
  • Additional withholding: You can request an additional amount to be withheld from each paycheck.

Note: You must specify a filing status and your number of withholding allowances on Form W4. You cannot specify only a dollar amount of withholding.

Everyone should check withholding

We highly recommend that everyone do a Paycheck Checkup early in 2019. Though especially important for anyone with a 2018 tax bill, it’s also important for anyone whose refund is larger or smaller than expected. By changing withholding now, you can get the refund you want next year. If you happen to owe, boosting tax withholding early in 2019 is the best way to head off a tax bill a year from now. In addition, you should always check your withholding when a major life event occurs or when your income changes.

When to check withholding:

  • Early in the year
  • If the tax law changes
  • When life changes occur: 
    • Lifestyle: Marriage, divorce, birth or adoption of a child, home purchase, retirement, filing chapter 11 bankruptcy
    • Wage income: You or your spouse starts or stops working or starts or stops a second job
    • Taxable income not subject to withholding: Interest, dividends, capital gains, self-employment and gig economy income and IRA (including certain Roth IRA) distributions
    • Itemized deductions or tax credits: Medical expenses, taxes, interest expense, gifts to charity, dependent care expenses, education credit, Child Tax Credit, Earned Income Tax Credit 

How to check withholding

  • Use the Withholding Calculator on IRS.gov. The Withholding Calculator works for most people by helping you determine whether you need to give your employer a new Form W-4. You can use your results from the calculator to help fill out the form and adjust your income tax withholding. If you receive pension income, you can use the results from the calculator to complete a Form W-4P, Withholding Certificate for Pension and Annuity Payments, and give it to your payer.
  • Use the instructions in Publication 505, Tax Withholding and Estimated Tax. 
  • If you have a more complex situation, you may need to use Publication 505 instead of the Withholding Calculator. This includes those who owe self-employment tax, the alternative minimum tax or tax on unearned income from dependents. It can also help those who receive non-wage income such as dividends, capital gains, rents and royalties. The publication includes worksheets and examples to guide you through these special situations.

How to Change withholding

To change your tax withholding, you can:

  • Complete a new Form W-4 and submit it to your employer. Don’t file this with the IRS.
  • Alternatively, you can make quarterly estimated tax payments during the year to the IRS. See Form 1040-ES, Estimated Taxes for Individuals, for details. Estimated tax is the method used to pay tax on income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony, etc.). In addition, if you do not elect voluntary withholding, you should make estimated tax payments on other taxable income, such as unemployment compensation and the taxable part of your social security benefits.

Tax Cuts and Jobs Act

When you file your 2018 tax return, you may notice significant changes from the Tax Cuts and Jobs Act (TCJA) including lowered tax rates, increased standard deductions, suspension of personal exemptions, increased Child Tax Credit and limited or discontinued deductions.

The IRS has online resources that can help you understand how the TCJA affects you and your withholding

Remember, Peoples Tax is here to help you year-round with your tax questions, tax planning, and any issues that may arise. Feel free to email us at info@peoplestax.com or call us at (804) 204-1040.

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