We share IRS updates that frequently remind taxpayers to do a “paycheck checkup,” but what exactly is that, and why is it important?
Pay As You Go
Our income tax system is a “pay as you go” system where taxes are owed as the income is being earned or received (annuities and pensions also count). When beginning a new job, employees fill out a Form W-4, Employee’s Withholding Allowance Certificate indicating their filing status and number of withholding allowances.
Employers then “withhold” a portion of an employee’s income and send it to the IRS. This is usually reflected in each pay stub, and on Form W-2, Wage and Tax Statement that employees receive (from their employers) at the beginning of the year.
If the withholding is incorrect, or there is additional income from other jobs or the sharing economy, taxpayers may end up with an unwelcome tax time surprise.
Who Needs It?
Everyone – even those who did one in 2018, and especially if any tax was owed when filing for 2018 – needs to do a paycheck checkup. Additionally, any time there is a change in income or a major life event, such as getting married or divorced, giving birth to or adopting a child, it’s also time to do a paycheck checkup.
The IRS has a handy Withholding Calculator to help taxpayers determine appropriate withholding allowances so they can make sure enough is being taken out of their paychecks or other income to cover the tax owed.
If you had a 2018 tax bill or if the calculator indicates your withholding is too low, you can easily adjust it. Ask your employer for a new W-4, make the necessary changes, and avoid a 2019 tax bill next year!