Your employer may not be withholding enough from your paycheck to cover your federal tax bill for this year. A new government report found that’s the case for more than one in five taxpayers, so they’ll all owe the IRS money next April when they file 2018 tax returns.
The Tax Cuts and Jobs Act, which went into effect in January, was the first major overhaul of the U.S. tax code in 30 years. Intended to reduce tax rates for many businesses and individuals, the reform meant that employers needed to recalculate the amounts they traditionally withheld from employees’ paychecks for federal income taxes. Some employers may have made mistakes in recalculating; when the new tax law took effect, there were still many unknowns surrounding how it would affect various groups of taxpayers.
But employers can’t take all the blame. In some cases, the employer may be withholding too little based on the Form W-4 the employee completed, says Steve Smith, CPA, senior member of the tax practice group at Barfield Murphy Shank & Smith in Birmingham, Ala. In some cases, an employee may have a balance due in April but won’t have a penalty for under-withholding. However, if you’ve under-withheld beyond the IRS minimum threshold, which varies based on your tax bracket, you may have a balance due in April along with penalties for underpayment of withholdings.
Start by checking your W-4, which your employer should have on file, to make sure all the information is current and accurate. For instance, if your marital status or other information has changed, you need to update your W-4.
Also, think about all sources of income: Even if your W-4 is correct and your employer properly withholds from your paycheck, you may still owe tax in April if you have other income outside of your primary job, Smith says. If your goal is to ensure that you have no balance due in April, “prepare a projection of taxable income and income tax for the current year, and compare the calculated income tax to the total withholding anticipated for the year,” Smith says. “For 2018, this will mean considering the application of the new law to your individual circumstances.”
When you have a clear handle on how much you expect to earn this year, you can make sure the correct amount is coming out of your paychecks by using the IRS’ online tax withholding calculator.
If your W-4 is accurate and your employer is withholding the right amount based on it, but you still think you may owe the IRS in April, you can request that an additional amount be withheld from each paycheck. Make this request on line 6 of a new 2018 Form W-4. “The additional withholding amount can assist you in remedying any year-to-date underwithholding,” Smith says.