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Are you Withholding at the Correct Rate?

Are you Withholding at the Correct Rate?

Withholding Checkup
Whether you filed your 2018 tax return or filed an extension, it may be wise to review and check your 2019 withholding. 

For taxpayers who filed a 2018 tax return and already know the effect of the Tax Cuts and Jobs Act (TCJA) on your tax position, it may still make sense to check your withholding if you had or will have a life changing event in 2019.  A life changing event could include changing jobs, getting married, getting divorced, or having a baby.

For those who have extended their 2018 tax return and are unsure of the total impact of the TCJA on your tax situation, a withholding check should be taken into consideration.  The TCJA changed many items that could affect individual income tax returns in 2018 and future years.  Therefore, if you haven’t checked your withholding for 2018, you may not only have a surprise outcome on your 2018 tax return, but also on your 2019 tax return.  Like those who have already filed their 2018 tax return, if you had or will have a life changing event, a withholding check is worthwhile.

The IRS adjusted income tax withholding tables to reflect the TCJA.  Click here to check your withholding: https://www.irs.gov/individuals/irs-withholding-calculator

Backup Withholding
Employers - are you using the new lower rates for backup withholding? 

The Tax Cuts and Jobs Act (TCJA) enacted in December 2017 lowered the rate to 24 percent from 28 percent effective January 1, 2018.  Backup up withholding could apply to payees in the following situations and only applies to items not otherwise subject to withholding (i.e. payments reported on form 1099’s – non-employee compensation, interest, dividends, etc.).  Below are items that require backup withholding:

  • No taxpayer identification number (TIN)
  • Incorrect TIN
  • TIN supplied in an improper manner
  • Underreported interest or dividends
  • Failure to certify that you’re subject to backup withholding for underreporting of interest and dividends

Backup withholding can be stopped if the payee corrects the issue that caused it.

Form 945, Annual Return of Withheld Federal Income Tax, is used to report the amount of backup withholding withheld by the payer. The form is due by January 31st following the calendar year end.  The amount withheld also needs to be shown on the form (usually Form 1099) furnished to the payee and filed with the IRS.   

Bonuses and Other Supplemental Wages
Tax withholding rates that normally apply to bonuses, back wages, payments for accumulated leave and other supplemental wages were also lowered by the TCJA. The rate was reduced from 25 percent to 22 percent, effective January 1, 2018. For payments exceeding $1 million, the rate was reduced from 40 percent to 37 percent.

For more information on individual tax return items changes under the TCJA, please refer to the following articles posted on our website

https://www.herbein.com/blog/have-you-been-checking-your-paycheck

https://www.herbein.com/blog/tax-reform-summary

Article written by Christel D. Wenrich. For additional information contact us at info@herbein.com