IRS urges taxpayers to check withholding calculator to avoid surprises
The Internal Revenue Service has been sending a series of messages in recent weeks to taxpayers and tax professionals urging them to check the online withholding calculator to make sure they have the proper amount withheld from their paychecks so they can avoid a nasty surprise next tax season.
Last December’s passage of the Tax Cuts and Jobs Act, with its overhaul of the tax code, prompted the need for the withholding calculator and new withholding tables for the Form W-4. Not only does the new tax law eliminate personal exemptions and many tax deductions, it also imposes sharp limits on popular longstanding deductions such as for state and local taxes. The doubling of the standard deduction also means many taxpayers who are used to itemizing their deductions every year won’t need to do so.
The IRS is especially urging people who work in the so-called “sharing economy,” such as ridesharing service drivers, to do a “paycheck checkup.”
“Many people working in the sharing economy are employees, in which case their employers should be withholding taxes from their wages,” the IRS said in an email to small businesses on Tuesday. “Many others are not working as employees, so they need to make sure they pay their taxes either through withholding from other jobs they may have, or through estimated taxes. Either way, because of the far-reaching tax changes taking effect this year, IRS urges taxpayers, including those in the sharing economy, to perform a Paycheck Checkup now. The easiest way for most employees to check their withholding is through the Withholding Calculator available on IRS.gov.”
Last week, the IRS sent out similar warnings to taxpayers with children and other dependents and to taxpayers who “got a big refund” this year. I finally got around to checking the withholding calculator last week, even though it debuted at the end of February, and made the disturbing discovery that I needed to basically redo my W-4 withholdings. The calculator advised me to change my exemptions from two to zero. Even though I thought I had already changed my W-4 earlier this year, it turned out I still had two personal exemptions there. On top of that, it estimated I should have an extra $65 taken out of my paycheck every pay cycle until the end of the year. So much for the tax cut I thought I was getting this year.
Even though the IRS says the calculator is easy to use, it’s actually fairly complicated. You have to get your most recent pay stub and a copy of your most recent tax return. You then have to start taking information from specific lines on your return and your pay stub, hoping your employer used a term similar to the one in the withholding calculator. Even then, the IRS can only provide an estimate, or at best a guess on how much extra to withhold for the rest of the year. The average taxpayer is likely to need help from a tax professional to advise them.
A recent report from the Government Accountability Office estimated that 21 percent of taxpayers will underwithhold their taxes this year, based on simulations run by the Treasury Department, compared to 73 percent who are projected to overwithhold (see GAO: 21% of taxpayers will underwithhold in 2018). With between one-fifth and one-quarter of 30 million taxpayers estimated to be underwithholding, that means millions of people who were expecting to get a tax cut next tax season will instead find themselves owing money to the IRS when they do their taxes.