22 Aug Performing a Paycheck Checkup with the IRS’s New Withholding Estimator
The amount you withhold from your paychecks can directly impact how much you owe in taxes when tax season rolls around. The goal, of course, is to withhold the perfect amount so that you neither owe taxes nor need to collect a refund. But since that rarely happens, you want to get as close to that scenario as possible. The best way to do this is by checking up on your withholdings every year, and ensuring you’re having the right amount held back from your paychecks.
To help with this, the IRS has recently released a new Tax Withholding Estimator. Here’s what you need to know about using this new tool, and how it differs from the old Withholding Calculator.
So, why the new Estimator? What was missing with the Withholding Calculator? Many individuals who used the IRS’s old Withholding Calculator complained that it was only truly functional for single-wage, W2 employees. Individuals who collected pensions, were self-employed, or had multiple incomes struggled to get an accurate number out of the Withholding Calculator.
The Tax Withholding Estimator is much more thorough, and accounts for a much larger variety of income sources, including Social Security income, pensions, self-employment income, bonuses, and more. This makes it far more useful for taxpayers who don’t rely solely on W2 income.
The new Estimator is also much more user friendly. It walks you through relevant questions step by step, using clear and simple language so that you don’t have to worry about translating tax-related jargon. You can also skip questions that are not relevant to you, and go back and change your responses without having to start over. This is a significant upgrade from the previous tool.
How to Use the Estimator
The Tax Withholding Estimator is intended to help you determine if you need to update your withholdings on your paycheck or pension check by calculating the approximate amount you would owe in taxes this year. This means that you will need to have relevant tax information on hand, including your most recent paycheck, your spouse’s most recent paycheck, last year’s tax return, and values of any itemized deductions you plan to take. Remember, the less accurate the information you input, the less accurate the Estimator’s results will be.
Once you have all that information on hand, just go to the IRS’s Tax Withholding Estimator and get started. As we stated earlier, this tool will walk you through the questionnaire so that there’s no confusion over what information you need to input.
Because your tax situation can change, it’s important that you revisit the Estimator when you experience a major life change, like switching jobs, having a baby, getting married, or buying a house. Even if your situation hasn’t changed, we recommend doing a “paycheck checkup” at least once a year.
If you have any questions about using the Tax Withholding Estimator, or need assistance adjusting your withholdings, contact our tax planning experts in Provo for assistance.