Now more than ever the IRS wants everyone to use its withholding calculator to do a “paycheck checkup.” That’s because most workers saw an immediate increase in their paycheck after the Tax Cuts and Jobs Act was signed into law in December 2017.Even before the law was enacted, payroll withholding has always been something that every taxpayer needed to get just right. Why?
- If you have too little taken out of each paycheck, you’ll owe money when you file your return. You may even owe penalties for underpayment.
- If too much money is withheld, you’ll get a refund.
What’s wrong with getting a refund? You’ve given the IRS free use of your money, which you could have put to better use yourself throughout the year.
For example, you could earn interest in a high-yielding certificate of deposit. Compare CD rates at Bankrate.
The best course, tax experts say, is to adjust your withholding so your tax payments in our pay-as-you-earn tax system will match your actual tax liability.
How to get it right
To make any change, file a new W-4 form with your employer. This will change the amount that comes out of your paycheck.
If you owe the IRS:
- Decrease the number of personal allowances on your W-4.
- Or, simply ask that a set amount be taken from each paycheck. To figure out how much, take the amount you owe and divide it by the number of pay periods remaining in the current year.
If you regularly get a big refund:
- Increase the number of personal allowances.
- The adjustment will give you a bit more cash in each paycheck. Don’t just spend it, but open an account — savings, money market or CD — that will earn you, and not the federal government, interest.
Take a fresh look when things change
You should adjust your withholding any time there’s a major change in your life — such as if you marry, welcome a child into your family or buy a home. Each of these circumstances can affect the amount of tax you’ll owe.
The IRS offers an interactive withholding allowance calculator and a couple of work sheets on Form W-4 to help you figure out the changes to make to your withholding amount. To expedite the process, gather together your most recent pay stubs and last year’s tax return to help you estimate your income for this year.
If your situation is more complicated – like if you’re self-employed, you’ll owe investment taxes or you collect taxable Social Security benefits – the IRS recommends that you refer to Publication 505, Tax Withholding and Estimated Tax.