Our office not only prepares tax returns, but we also do accounting and payroll work for small businesses throughout the Battle Creek area. We are just finishing up the year-end rush to complete hundreds of W-2 and 1099 forms. Now, the phone will start ringing as employees begin to get the results of their tax returns. We will get everything from “why didn’t you take any taxes out?” to “please take another $50 out of each check.” So, my free advice this Friday is a basic lesson in payroll withholding.
My first piece of advice – Look at your paycheck stub! Be sure that all the information is correct. All the information that will be used to create your W-2 is listed on the stub. Be sure your name is spelled properly; your address is correct, and your social security number is accurate. If you move, please be sure to inform your employer to update your address. It can change the taxability of your income.
Next – The higher the number the lower the withholding! When we begin a job, our employer has us fill out an entire stack of paperwork. Some of the forms that need to be completed are a series of W-4 Forms. These forms tell the employer how much tax to withhold out of your paycheck for the various taxing authorities. If you list your filing status as Married with 9 dependents and you make $750 a week, you will not have any withholding coming out of your check. The reason is that the payroll software makes assumptions about your tax situation based on the information that it has. In this example, the software will average out the amount of income to show that you will earn $39,000 during the year and that you will have no tax liability after the $24,000 standard deduction and credits for the 9 dependents.
Then we have the doubles – Double Wage Earners or Double Income Sources; this creates a new level of complication that payroll software does not have the information necessary to compute the entire situation. My husband and I have always been a double income household, so I know the added complication of having two sets of wages to put together at the end of the year. Remember, payroll software only works with the numbers that it is given and is not clairvoyant. When my paycheck is calculated, my earnings are annualized, and taxes are calculated on the assumption of that being my only income. The same happens for my husband’s paycheck. When we put our income together for tax filing, the income falls into a different tax bracket. This can also happen for retirees who have pension income, social security income, and retirement account distributions.
Finally – prepare for some surprises! 2017 withholding verses 2018 was a dramatic change. For a single person with no dependents making $500 per week, the 2017 withholding was $60, and in 2018 it is only $48. While most of us probably noticed that we got a few more dollars in our paycheck each week, we were not thinking about the cumulative effect at the end of the year. In 2017 this person would have had $3,120 paid in towards their tax liability, in 2018 that number drops to $2,496. While both examples will still result in a refund, the 2018 refund will be roughly 15% less than in 2017.
To sum up this Friday’s free advice – Be sure to look at your paycheck stubs, check your withholding status, and brace yourself!
Check back next week for an update on the start of e-filing season and refund schedules.