Major tax reform was approved by Congress in the Tax Cuts and Jobs Act on Dec. 22, 2017. One change directly affected the rate at which taxes are withheld from paychecks. Our federal income tax is a pay-as-you-go tax system and there are two ways to pay as you go, either through withholding or estimated tax payments.

If you are an employee, your employer may withhold income tax from your pay. Your pay includes your regular pay, bonuses, commissions, and vacation pay and other amounts. Tax may also be withheld from certain other income — including pensions, bonuses, commissions, and gambling winnings. In each case, the amount withheld is paid to the IRS in your name. When the withholding rates change, it changes the amounts that are paid to the IRS on your behalf.
 

Who should check that enough withholding is being withheld?

To ensure that enough withholding is paid to avoid owing a balance due and possible penalties, it is recommended that everyone do a “paycheck checkup” now.  

Generally, it is recommended that people check the amount withheld each year; particularly when the rates you pay change or your family situation changes. It’s especially important for people with more complicated financial situations verify they are having the correct amount withheld as the law also changed the standard deduction, removed personal exemptions, increased the child tax credit, limited or discontinued certain deductions and changed the tax rates and brackets.

How do you check your withholding?

Use the IRS Withholding Calculator on IRS.gov. This tool is designed to help you determine the right amount of tax withheld from your paycheck.

The amount of income tax your employer withholds from your regular pay depends on two things.

• The amount you earn, and
• The information you give your employer on Form W–4, Employee’s Withholding Allowance Certificate.

If your employer isn’t withholding the proper amount to cover your taxes under the new rates provided to them by the IRS, you may need to complete a new Form W–4 to change the amount withheld.

Plan ahead: Tips for using the Withholding Calculator

The Calculator will ask you to estimate your 2018 income, number of children you will claim for the Child Tax Credit and Earned Income Tax Credit, and other items that will affect your 2018 taxes. You might need to:

• Gather your most recent pay stubs.
• Have your most recent income tax return handy;

The Withholding Calculator works for most taxpayers, however, people with more complex tax situations should use the instructions in Publication 505, Tax Withholding and Estimated Tax, expected to be updated in early spring. This includes taxpayers who owe self-employment tax, alternative minimum tax, the tax on unearned income of dependents or certain other taxes, and people with long-term capital gains or qualified dividends.

How do you change your withholding?

If, you think you need to make changes to the amount withheld, the calculator gives you the information you need to fill out a new Form W–4, Employee’s Withholding Allowance Certificate. (The Form W-4 tells your employer how much you want them to withhold.) You will need to submit the completed W-4 to your employer.

For more resources and information:

• When to Change Your Withholding
• Pay As You Go, So You Won’t Owe: A Guide to Withholding, Estimated Taxes, and Ways to Avoid the Estimated Tax Penalty
• Frequently Asked Questions and Answers for Individuals

Source: taxpayeradvocate.irs.gov