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Do a ‘Paycheck Checkup’ now, avoid a surprise year-end tax bill

Posted by Admin Posted on Aug 27 2018

do a paycheck checkup now avoid a surprise year end tax bill

 

The Internal Revenue Service urges anyone working in the sharing economy to perform a Paycheck Checkup now to avoid an unexpected tax bill when they file their return next year.

Many people working in the sharing economy are employees, in which case their employers should be withholding taxes from their wages. 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.

The U.S. tax system operates on a pay-as-you-go basis, so taxes must be paid as income is received rather than at the end of the year. This includes anyone involved in the sharing economy.

People who participate in the sharing economy but do not have an employer, usually need to make quarterly estimated tax payments to cover their tax obligation. In this case Publication 505, Tax Withholding and Estimated Tax, and the worksheet in  Form 1040-ES, Estimated Tax for Individuals, can help people check their withholding and figure their payments correctly. IRS Direct Pay is the fastest and easiest way to pay.

In recent years, the IRS has seen the number of taxpayers who paid the estimated tax penalty jump from 7.2 million in 2010 to 10 million in 2015, an increase of nearly 40 percent. Using the Withholding Calculator or Publication 505 and following the recommended steps can help avoid this underpayment penalty.

Sharing Economy Tax Center and other resources

The IRS has created the Sharing Economy Tax Center to help people quickly find answers to tax questions and forms for the sharing economy. The Center features:

The IRS’s Pay As You Go web page and Publication 505 can help people understand withholding and estimated payments.

People with more complex situations may need to use Publication 505

Taxpayers with more complex situations might need to use Publication 505 instead of the Withholding Calculator. This includes employees who owe self-employment tax, the alternative minimum tax or tax on unearned income from dependents. It can also help those who receive non-wage income such as dividends, capital gains, rents and royalties. The publication includes worksheets and examples to guide taxpayers through these special situations.

In some of these situations, a household may make estimated tax payments but also have tax withheld by an employer. It’s important to account for both amounts when figuring how much tax to have an employer withhold. Publication 505 helps taxpayers include estimated tax payments; the Withholding Calculator does not. 

Do a ‘Paycheck Checkup’ soon

Taxpayers need to adjust their withholding as soon as possible for an even, consistent amount of withholding throughout the rest of the year. Waiting means there are fewer pay periods to withhold the necessary federal tax – so more tax will have to be withheld from each remaining paycheck.

Whether someone uses the Withholding Calculator or Publication 505, it’s helpful to have their completed 2017 tax return handy to help estimate the amount of income, deductions, adjustments and credits to enter. They’ll also need their most recent pay stubs to help compute their withholding to date.

Employees can use the results from the Withholding Calculator or Publication 505 to help determine if they should complete a new Form W-4, Employee’s Withholding Allowance Certificate, and what information to include on the form.

Though primarily designed for employees who receive wages, the Withholding Calculator can also be helpful to some taxpayers receiving pension and annuity income. Recipients of pensions and annuities can change their withholding by completing Form W-4P and submitting it to their payer.

All taxpayers should remember that if their personal circumstances change during the year, they should re-check their withholding.

Taxpayers who change their withholding for 2018 should recheck their withholding at the start of 2019. This is especially important for taxpayers who reduce their withholding sometime during 2018. A mid-year withholding change in 2018 may have a different full-year impact in 2019. If taxpayers don’t submit a new Form W-4 for 2019, their withholding might be higher or lower than intended. To help protect against having too little withheld in 2019, taxpayers should check their withholding again early in 2019.

Adjusting withholding

If an employee determines they should adjust their withholding, they should complete a new Form W-4 and submit it to their employer as soon as possible. Some employers have an electronic method to update a Form W-4.

If an employee has a change in personal circumstances that reduces the number of withholding allowances they can claim, they must submit a new Form W-4 within 10 days of the change with the correct number of allowances.

As a general rule, the fewer withholding allowances an employee enters on the Form W-4, the higher their tax withholding will be. Entering “0” or “1” on line 5 of the Form W-4 means more tax will be withheld. Entering a bigger number means less tax withholding, resulting in a smaller tax refund or potentially a tax bill or penalty.

Employees may also need to determine if they should make adjustments to their state or local withholding. Contact the state's department of revenue to learn more.

Additional information

The Withholding Calculator does not request personally identifiable information such as name, Social Security number, address or bank account numbers. The IRS does not save or record the information entered on the calculator. As always, taxpayers should watch out for tax scams, especially via email or phone and be alert to cybercriminals impersonating the IRS. The IRS does not send emails related to the calculator or the information entered in it.

The IRS also reminds taxpayers needing advice regarding the new tax law and their personal situation should consider consulting a trusted tax professional.

Taxpayers can get more information on these topics at www.irs.gov/withholding. Additionally, IRS.gov/getready has information about steps taxpayers can take now to get a jump on next year’s taxes, including how the new tax law may affect them.

The information provided on the LBCPA Blog is a community service for general information purposes only, and should not be used as a substitute for consultation with professional advisors who specialize in the topics covered. Please refer to your advisors for specific advice on these subjects. The information is not intended to be used, and it cannot be used, for the purposes of avoiding U.S. Federal and/or State tax laws or the tax laws of any foreign jurisdiction.

These blogs contain general information only and Lord Breakspeare Callaghan LLC or any of the other companies or firms presenting information are not providing accounting, business, financial, investment, legal, tax, or other professional advice or services. Lord Breakspeare Callaghan LLC or any of the other companies or firms contributing with articles shall not be responsible for any loss sustained by any person who relies on this information.

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