It’s a mistake that 21 percent of taxpayers could have made this year. Thanks to the Tax Cuts and Jobs Act that was signed into law in Dec. 2017, some people may owe more to the IRS this year than ever before depending on their tax bracket and filing situation. Why? They may have made a major tax withholding mistake.
While the Treasury Department and the IRS updated their withholding tables to offer a guideline to how much income taxes need to be deducted from your paycheck, some people did not change their tax withholding amounts accordingly. And if you’re one of these people, you’ll have an unfortunate surprise ahead of you come filing time.
Here’s what you need to know about withholding tax:
What is it?
Withholding tax is when your employer takes taxes directly out of your paychecks to send to the IRS and any state tax authorities for you. Employers do this in an attempt to leave you even with any tax collectors by the end of the year. If more tax is withheld than necessary, you’ll end up with a tax refund when you file your taxes.
When it comes to refunds, giving the government what is essentially an interest-free loan isn’t ideal. Still, it’s better than what happens if not enough tax is withheld.
What happens if I didn’t withhold enough taxes?
If you’re part of the 30 million people who didn’t withhold enough taxes in 2018, you may be in for a not-so-pleasant surprise when you go to file. If you didn’t withhold enough taxes, you’ll end up owing a big tax debt when you file your taxes (and potentially getting slammed with an underpayment penalty).
Tax bill too big for you to pay immediately? Don’t worry – there’s always options available to you. You can work with a tax professional to figure out a way to pay that will work for your unique situation.
Is there anything I can do to fix it now?
Unfortunately, you can’t change your withholdings for 2018 now that the year is over and done.
However, this is the perfect opportunity for you to update your withholdings for 2019. Since the withholding table has no foreseeable updates in the near future, you should make time with your tax preparer to review your withholdings. You can also use the IRS’s handy withholding calculator to check your tax withholding. If you need to make changes, update your W-4 form and give this updated version to your employer.
Performing a paycheck checkup now will help you ensure you’re paying the right amount in taxes throughout the year. Take some time to check your tax withholdings now to ensure you’re not left with a hefty tax bill (or an unnecessarily hefty tax refund) come filing time in 2020. If you need help figuring it out, give us a call. Our tax prep experts are always here to help you file timely tax returns to optimize tax breaks and avoid mistakes the first time.