Why Withholding Amounts Should Matter
With the Tax Cuts and Jobs Act of 2017 came several tax law changes for 2018, including increasing standard deductions and the Child Tax Credit and the removal of personal exemptions. These changes could have a substantial impact on the tax refund or balance due on tax returns filed next year. As such, many of your employees could find that their payroll tax withholding isn’t enough to protect them from penalties for underpayment of estimated tax. On the flip side, they could be having too much tax withheld from their paychecks – and that is extra money that could go into their paychecks.
Employers should alert and encourage employees to ensure their withholding amounts are correct (if they haven’t already), and, if need be, submit a new Form W-4. The IRS has a helpful Withholding Calculator on IRS.gov to estimate 2018 income tax and determine the correct amount of federal income tax taxpayers should have withheld from their paychecks.
Determining how much you should withhold will be determined by the amount you earn and the information reported on Form W-4. When using the IRS’s withholding calculator, it’s helpful to have a completed 2017 tax return available.
Unfortunately, since it is now later in the year, there are fewer pay periods to take advantage of any tax changes, which would have had a more significant impact. The current interest rate for computing the penalty for underpayment of estimated tax is 5 percent. In addition, since personal exemptions have been repealed for federal tax reporting but not for state tax reporting, employees must submit separate state income tax withholding instructions as well. Each state’s department of taxation website will have 2018 Employers Withholding Instructions.
If you’re not sure where to start, encourage your employees to reach out to their payroll department or to their tax advisor for professional insight into their specific situation. Generally speaking, it’s always good practice to check withholdings at the beginning of each year as circumstances change. Marriage, divorce, children or a second job can impact a person’s tax situation. You might help your team members stay on top of this responsibility by sending out reminders at the beginning of the year, taking the time to speak to employees one-on-one or address the importance of updating withholding amounts during your next team meeting.
By Cindy Kula, CPA, PFS, CFP (Cleveland office)