Employees Must Be Proactive to Determine Accurate Payroll Tax Withholding

Way back at the end of February we wrote about the new payroll tax withholding guidelinesissued by the IRS. Since that time, the IRS has issued a new Form W-4, more information, and calculators that can help in determining payroll tax amounts to be withheld. Because of the sweeping changes in other parts of the tax law, the IRS is encouraging employees to be proactive – and are even providing some tools to do that.

There’s a new Form W-4 in town

First, and probably of note to employers, employees are not required to complete and submit the new Form W-4 to employers. The IRS revised the withholding tables to accommodate the old Form W-4 for the 2018 tax year. That comes with a BIG BUT! Employees are urged to use the new withholding calculator at IRS.govand suggest that employees who do submit a new Form W-4 may have a more accurate amount of tax withheld from their pay.

In fact, the new Form W-4 instructions state that if you use the withholding calculator, you don’t need to complete any of the worksheets for Form W-4. Experts are taking this as an indication that the calculator may be the most reliable method to match payroll tax withholding amounts to actual tax liability.

As an employer, small business owners might want to encourage employees to use the calculator and submit a new Form W-4 during the calendar year to prevent surprises when their employees file their 2018 tax returns.     

Some employees might find no need to make a change in their payroll tax withholding, but other employees might determine that too little, or too much, is being deducted from their paychecks. According to the Society for Human Resource Management (SHRM), employees to which any of the following apply should definitely review their withholding status:

• Have two incomes or are in two-income families.
• Work only part of the year.
• Have dividends of capital gains from securities held in taxable accounts.
• Claim the Child Tax Credit, the Earned Income Tax Credit or other credits.
• Itemized deductions in 2017.
• Have high incomes and more complex tax returns.

It’s not going to be a once-and-done calculation

In order to use the calculator, employees will need to have their most recent paystub available, because they will be asked to enter the amount of federal income tax withheld for the pay period and the year-to-date amount of federal income tax withheld.

Some employees might want to seek professional tax and financial advice from an accountant. Don’t forget that a mid-year adjustment to your payroll tax withholding might need to be re-evaluated at the beginning of the calendar 2019 year. This is because an adjustment for 2018 withholding will result in a full-year’s application in 2019.

The bottom line is that employees are going to have to play a more active role in determining the most accurate amount of money to be withheld from their wages for taxes.This is because each family’s tax situation is going to be unique to them. The best thing an employer can do is encourage workers to make use of the calculator and information on the new Form W-4, or to avail themselves of the guidance of a professional financial advisor.

Payroll processing has taken on a new complexity

Employers might be well advised to seek the guidance of professionals and experts, too. Payroll and payroll taxes have always been a complicated process, rife with potential for problems for employers. More small business owners are outsourcing payroll to professional payroll processing firms like The Payroll Department. Because we stay on top of the changes and have experience in dealing with the government agencies, you don’t have to worry about making a mistake and then having to pay for it.

Don’t take chances with your business. Call me, Teresa Ray, at 317-852-2568. I have been processing payroll and dealing with the IRS for almost three decades and I will be happy to put my expertise to work for you!

-Teresa Ray, owner of The Payroll Department

This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.