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Avoid Tax Surprises With a Paycheck Checkup

In 2018, the individual tax rates changed and the IRS updated the income tax withholding tables, but only 20% of taxpayers took the time to update their W-4. This resulted in some very unhappy people when they filed their returns last year. If you’re like most Americans, you probably only review your W-4 when you start a new job, get married, or have a baby. The Internal Revenue Service (IRS) suggests that you review your withholding more frequently. If you don’t, it could lead to an unexpected tax bill and/or penalties. A paycheck checkup, however, can help you avoid unpleasant tax surprises.

When to Do a Paycheck Checkup

The IRS encourages taxpayers to conduct a paycheck checkup annually, or whenever there has been a major life change. You should also check your withholding if you can answer “yes” to any of the following:

  • Two or more people earn an income in your family
  • You work multiple jobs
  • You work seasonally or only part of the year
  • You claim the child tax credit
  • Your dependents are age 17 or older
  • Previously, you itemized your deductions
  • Your income level is high
  • Your tax return is complex
  • You received a large refund
  • You had a tax bill

Don’t forget that bonuses, distributions from mutual funds or stocks, as well as other financial transactions can also have an unexpected impact on your tax bill. Take this into consideration when making adjustments to your withholding.

Use The IRS Tax Withholding Estimator

The IRS Tax Withholding Estimator is an online tool you can use to determine the right amount of tax to withhold from your paycheck. This can help protect you from having too little withheld, which could result in a tax bill you are unable to pay. Before you use the tool, be sure to watch the IRS step-by-step tutorial video. Once you are ready to proceed, make sure you have the following items on hand:

  • Most recent pay stubs for you and your spouse (if applicable)
  • Most recent income tax return
  • Information for any other sources of income

You will not be asked to enter your name, social security number, or other sensitive information. It’s completely anonymous and the IRS does not save or record any of the data you enter. There are five basic sections the tool covers: filing status, income and withholding, adjustments, deductions, and tax credits. Most people can complete the assessment in under ten minutes. If you have questions about the tool or your results, be sure to check out the Tax Withholding Estimator FAQs.

What’s Next?

Once you receive your results from the Tax Withholding Estimator tool, you’ll be better equipped to make the necessary changes to ensure you’re not hit with an unexpected tax bill. If you’re due a refund, you have two options. You can make no changes if you wish to receive the expected refund amount. The other option is to decrease your withholding to receive more money in your paycheck now and a smaller refund later. If the estimator shows that you will owe taxes, review the chart below to see what steps you should take next to help lower your anticipated tax bill.

IRS tax withholding estimator

If you’re currently unemployed and worry that you may owe taxes next year, you can adjust your withholding by completing Form W-4V, Voluntary Withholding Request. Keep in mind that the tool provides an estimate and your actual taxes may be higher or lower, especially if there are any unexpected changes to your income. It’s still a good idea, however, to make a habit of using the IRS Tax Withholding Estimator Tool and reviewing your W-4 annually. You’ll reduce the chances of being blindsided by a large tax bill and have more control over your paycheck.