The IRS issued a series of bulletins over the summer intended to encourage employers to inform their employees about tax changes for the 2018 tax year. At the heart of the bulletins are two changes resulting from tax legislation signed into law last December (2017): the elimination of personal exemptions and an increase of the standard deduction.
While the implications of the tax legislation will not have a major impact on most people, there are some who will face a tax bill come April if they fail to make changes to withholding now. Those IRS bulletins were intended to make employers aware of this fact in the hope that they will encourage their employees to conduct what the government refers to as a 'paycheck checkup'.
According to the IRS, "everyone should check their withholding" due to tax law changes. One of the bulletins issued earlier in 2018 lists eight scenarios that could result in an April tax bill if no changes are made:
- Having at least two incomes in the family
- Having two or more jobs simultaneously
- Working only a seasonal job
- Claiming certain credits (like the child tax credit)
- Supporting one or more dependents aged 17 or older
- Having itemized deductions on a 2017 return
- Being a high-income earner or having a complex tax return
- Having received a large refund or faced a high tax bill for 2017.
There aren't many working people in the U.S. who do not fall into one of the eight scenarios listed above. If one of the above scenarios implies though, it doesn't necessarily mean the employee needs to change withholding amounts. It just means that person needs to check.
The Issue at Hand
The issue that is causing all the fuss is the elimination of personal exemptions. Eliminating these exemptions was seen as a way to streamline the tax filing process. In exchange for the money that would be lost, Congress nearly doubled the individual standard deduction from $6,500 to $12,000.
For many people, the increased standard deduction will offset the elimination of personal exemptions so that no additional tax is due. But there is no guarantee that will be the case for everyone. Thus the need to do the paycheck checkup. It is critical that employees conduct such a check as soon as possible inasmuch as time is running out to increase withholding sufficiently enough to avoid a tax bill in April.
The IRS Offers a Tool
The IRS does not expect employers to conduct a paycheck checkup on behalf of their employees. In fact, employers are prohibited by law from giving tax advice to workers. The good news is that the IRS has created a free, online tool for performing a paycheck checkup.
Employers are urged to provide information to workers about the tool. This information can include a direct link to the IRS website. Once there, an employee can quickly enter a minimal amount of information to discover how much should be withheld in order to cover that person's tax bill. If an insufficient amount is being withheld currently, the employee can either increase withholding by filling out a new W-4 or put the difference away in a savings account and pay the bill directly next year.
As a payroll provider, we cannot legally increase withholding unless instructed to do so by way of a new employee W-4 form. Therefore, we encourage all employers to remind their employees about the IRS paycheck checkup. The checkup represents the best opportunity that workers have to make sure their taxes are squared away.