Posted by Earlier this week, the IRS issued new withholding tables for use by employers. Employers use these tables to determine the amount of federal taxes to withhold from your paychecks. Because the 2017 Tax Cuts and Jobs Act made major changes in the law, and because there is some question about the accuracy of these new tables, you will want to check whether your employer is withholding enough.
- Note: at McGovern Tax Services, we provide a complimentary withholding analysis for all clients whose tax returns we prepare. For more information, see our website here.
Why the IRS Issued These New Withholding Tables
Among other changes, the 2017 Tax Cuts and Jobs Act reduced tax rates, significantly increased the standard deduction, and eliminated personal exemption deductions. The overall effect of the legislation is to reduce the amount of tax owed by most taxpayers. The new withholding tables generally direct employers to withhold less in taxes from the paychecks of employees compared to the former tables.
Effect of The New Withholding Tables
Because your employer will withhold less in taxes than before, you should see an increase in your take-home pay. The IRS has directed employers to begin using the new tables as soon as possible, but no later than February 15, 2018. Exactly when you see the effect of the reduced withholding will depend on when your employer begins using the new tables and on how often you get paid.
Why This Matters
When your employer withholds taxes from your paychecks and pays those amounts to the federal government, the payments are treated as your prepayment of the taxes you owe for the year. When you file your 2018 return and calculate how much you owe in taxes for 2018, you will subtract the amount you have already paid in through withholding. If the withholding exceeds the amount you owe, you will receive a refund. The risk, however, is that your employer will not withhold enough under the new tables. If this occurs, you will owe taxes when you file your 2018 return. This is why it is important to determine whether your employer is withholding enough from your paychecks under the new tables.
What You Need to Do
You do not need to do anything immediately. The new withholding tables are designed not to require employees to file a new Form W-4 with their employers. (Form W-4 is the form that employees complete and turn in to their employers that allows the employer to determine how much to withhold from each paycheck.) However, once your employer begins withholding under the new tables, you will want to determine whether your employer is withholding enough. If not, you could face a large tax bill when you file your 2018 return early next year.
How You Can Determine Whether Your Employer is Withholding Enough
One approach is to use the withholding tax calculator on the IRS website, IRS.gov. The IRS is currently revising the withholding tax calculator and anticipates that it will be available by the end of February 2018. Another approach is to ask your tax adviser to do this analysis for you. At McGovern Tax Services, we perform this analysis at no additional charge for our clients.