the w-4 time-bomb and what to do about it

you don’t want clients to blame you for any unhappy surprises.

by barry j. friedman, cpa
industrynewsletters

with so many recent tax changes, two-income families and people who work multiple jobs should check their withholding amount.

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the irs is urging two-income families and folks who work multiple jobs to complete a paycheck checkup to verify that they’re withholding the right amount of tax from their paychecks.

you can check out the irs withholding calculator to help navigate the complexities of multiple employer tax situations and determine the correct amount of tax for each employer to withhold.

the passage of the tax cuts and jobs act affects 2018 tax returns and makes checking withholding even more important.

some tcja changes include:
• increased standard deduction.
• elimination of personal exemptions.
• increased child tax credit.
• limited or discontinued deductions.
• changed tax rates and brackets.

therefore, if you have a client with a more complex tax profile — if they’re a two-income family or if they work multiple jobs — they may be more vulnerable to being under-withheld or over-withheld following the tax law changes. this is why the irs encourages a paycheck checkup as early as possible to see whether they’re having the correct amount withheld for their personal financial situation.

if they need to adjust their paycheck withholding amount, doing so early gives more time for withholding to take place evenly throughout the year. waiting means fewer pay periods to make tax changes and this could have a bigger effect on each paycheck.

the irs withholding calculator is easy and accurate, says the irs, allowing taxpayers to enter income from multiple jobs or from two employed spouses and ensuring that they apply their 2018 tax deductions, adjustments and credits only once rather than multiple times with different employers.

of course, the withholding calculator’s results depend on the accuracy of information entered and may not take their entire tax situation into account.

clients need to know their w-4 form. they should submit their new w-4 form to their employer as soon as possible, if necessary.

in fact, they should submit to their employer a new w-4 with corrected withholding allowances within 10 days of the change. (note that the irs may be issuing a new w-4 form later this year, and it may be very different from the current one.)

as a general rule, the fewer withholding allowances an employee enters on a w-4 form, the higher the tax withholding. entering 0 or 1 on line 5 of the w-4 means more tax withheld. entering a larger number means less tax withheld, which would result in a smaller tax refund or potentially a tax bill or penalty. again, a professional can help you make the right decision here.

taxpayers typically prepay their taxes during the year through withholding from a job or via estimated quarterly tax payments if self-employed — sometimes both. not having enough taxes withheld can occur when they get married or divorced, have a baby or finally get that empty nest they’ve dreamed about. one of the most common under-withholding situations is the second-job scenario.

they may be doubling the exemptions, which would result in less tax withheld than required. to help them avoid the dreaded owe when they have two jobs, be sure to take into account second jobs and other special situations so there are no unpleasant surprises next april.

determining accurate withholding can be tricky, so talking to clients early is always a good idea.