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I thought I’d never say this, but I like the IRS website. Not necessarily the IRS or the tax system we have in place. Just their site. It has great information about taxes you can find answers to almost anything tax-related. One very useful tool on their site is their Withholding Estimator. If you are a W-2 employee, I suggest you use it now to estimate your tax liability and see if you are with your taxes for the year. Don’t wait. A paycheck checkup can help you see if you’re withholding the right amount of tax from your paycheck. Too little could mean an unexpected tax bill or even a penalty, both of which you are better off avoiding. Too much can mean a tax refund. While it may be nice to get a refund, it also means your paycheck every period is smaller than it could be. Why not shoot for zero or a small refund and save the money instead?
Why you want a paycheck checkup this year
It’s usually a good idea to check the withholding from your paycheck. You can see how much you are paying in federal taxes every pay period on your paystub. If you need help understanding your pay stub, check this post. Even if you owed no taxes and had a small refund this year, tax law changes all the time, which can result in a different combination of taxes vs withholdings. In particular, the form you fill out to determine the amount of federal withholdings, the W-4, changed this year, and that may have resulted in different withholdings for you.
Other important reasons for checking a paycheck checkup are:
- You changed jobs
- You lost your job
- Your bonus got smaller/larger than expected
- You have exercised or tendered stock options and RSUs
- You got married
- You have a combination of W-2 and self-employment income
- You had a child or have adopted one
- You have purchased a home
- Many other events that can affect your tax situation
When to do it
If you are a w-2 employee with a relatively predictable income, you may want to do the checkup at the beginning of the year, and run a checkup anytime something like any of the listed events above happen. If you haven’t or have experienced any of the changes listed above, are now is a good time to run a checkup for many of us. We still have about 4 months to go to the end of the year, so you can use this time to smooth out any potential adjustments to your withholdings.
How
Use the IRS Withholding Estimator. It’s really easy to use it. Make sure you have your most recent paystub with year-to-date information, your most recent 1040 form, and information on other sources of income, if any, like dividend, interest, property, etc. Before you use the calculator, watch this great video on how to use it from the IRS website.
What’s Next
When you are done entering your data, the calculator shows your estimated tax liability, your estimated tax payments for the year, and any discrepancy. If your tax liability for the year is greater than what you are withholding, then the calculator shows the amount of underpayment, and calculates the additional withholding per paycheck to include in your W-4 form (item 4(c)). The calculator also lets you include an estimated refund amount, in case you like to receive a check from the IRS after filing taxes.
If it turns out you are paying slightly more than the liability, you may be OK with that, and decide to do nothing. It’s likely (though not guaranteed) that you may get a small refund. So don’t wait, watch the video and get started this week!
Until Next Time!
Massi De Santis is an Austin, TX fee-only financial planner and founder of DESMO Wealth Advisors, LLC. DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow, and protect their resources throughout their lives. As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.
