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Have You Been Checking Your Paycheck?

Have You Been Checking Your Paycheck?
Keeping up to date on your 2018 tax withholdings and what to look forward to in 2019

Stay Informed: It is always important to stay informed about current tax laws that may affect your personal finances.  This is now even more important than ever as a result of the passage of the Tax Cuts and Jobs Act (TCJA) in 2017. TCJA includes many changes that could affect individual income tax returns in 2018 and future years. Since these changes will likely affect your federal income tax in 2018 if may be necessary to adjust your federal income tax withholding amounts to avoid an unexpected surprise when you file your tax return next April. Fortunately, the IRS is aware of this issue and has been providing tools and frequent reminders to assist taxpayers with the process of reviewing and possibly adjusting their federal income tax withholdings. Below is a summary of what the IRS has been saying.

IRS “Paycheck Checkup”:
Following the passing of the TCJA, the IRS knew there would be some changes to individual’s income taxation.  Because of this, the IRS made some modifications to their Withholding Calculator (https://www.irs.gov/individuals/irs-withholding-calculator) and is now urging taxpayers to utilize this tool.  According to the IRS, these are the taxpayers who need to be the most aware of changes in their withholdings:

  • Two-income families
  • Persons who held two or more jobs at the same time or only work part of the year
  • Those who claim the child tax credit
  • People with dependents age 17 or older
  • Those who had itemized deductions in 2017
  • High income or complex tax return individuals
  • Those with a large tax refund or tax bill for 2017

Using the withholding calculator provided by the IRS will likely greatly reduce your risk of having either too little or too much federal income tax withheld from your paychecks this year.  If you haven’t done so already, it is strongly recommended to use this calculator to adjust your 2018 withholdings as soon as you are able.  The sooner you act, the more likely you can easily adjust to the correct amounts and the less dramatic the effect will be on current net pay.

Going Forward – Payroll Changes for 2019:
Revised Form W-4
As a result of the individual tax changes in TCJA, especially the elimination of personal exemptions beginning in 2018, the IRS issued a revised Form W-4, Employee’s Withholding Allowance Certificate. The revised 2018 Form W-4 was issued in February 2018, at the same time the IRS rolled out the revised Withholding Calculator. In June, in an effort to provide additional assistance with determining federal income tax withholding for 2019 the IRS issued their draft Form W-4 for 2019 (https://www.irs.gov/pub/irs-dft/fw4--dft.pdf).  However, keep in mind this is just a draft and it should not be provided to employees at this time.  The IRS has cautioned that this only a draft and may change.  In 2019, employees will see some differences in the form as the IRS updated it to reflect changes made in the TCJA.  These changes include:

  • Number of Allowances Eliminated
  • “Head of Household” Marital Status Box Added
  • New Line 5 – Additions to Income
  • New Line 6 – Itemized and Other Deductions
  • New Line 7 – Tax Credits
  • New Line 8 – Additional Household Income Due to Multiple Jobs

While these changes have been made to the form, Line 9 – additional amount you want withheld from each paycheck, has remained the same in the 2019 draft.  In addition, it is important to keep in mind that for 2019, employees will be “strongly encouraged, but not required” to complete a new W-4.  This means employers will still be able to use prior year W-4’s for employees, requiring payroll systems to maintain both 2018 and 2019 withholding systems and calculations at the same time.  It will be crucial to update W-4’s in 2019 to stay up to date on your withholdings and take full advantage of the TCJA.

Projected increase in Social Security wage base amounts for 2019
In addition to W-4 changes made by the IRS, the Social Security Administration (SSA) released their wage base projections for 2019 through 2027.  They did so by releasing a table containing three estimates: high, intermediate, and low.  June 2018 projections show a wage base for 2019 of $132,300, an increase of $3,900 from 2018. 

ConclusionWhile the TCJA will result in a tax reduction for most individuals, if you determined your 2018 federal income tax withholdings using an outdated Form W-4 you may not be having the proper amount of tax withheld which could result in either an unwelcome balance due or an unexpected refund when you file your 2018 tax return next April. By using the IRS Withholding Calculator, you can adjust your 2018 withholdings accordingly to avoid an unexpected surprise at tax time.  Thinking ahead to 2019, take a peek at the IRS’ draft Form W-4 and the projected Social Security wage base to estimate how they may affect your payroll taxes and personal finances.

For more information regarding calculating your income tax withholdings or the Social Security wage base projections, please contact a member of the Herbein tax team, or email us at info@herbein.com.

Article written by Richard M. Staniszewski.