How To Conduct A Paycheck Checkup And Prevent Tax Time Surprises

Performing a quick “paycheck checkup” can help your nanny adjust her tax withholdings and protect against having too little or too much federal income tax withheld.

The IRS recently released an updated Form W-4 and withholding calculator based on changes to tax law from the passage of the Tax Cuts and Jobs Act. This is an ideal time for your domestic employee to conduct a “paycheck checkup.”

Your domestic employee should use the withholding calculator to make sure they have the right amount of income tax taken out of their paychecks if you are withholding this tax from their pay. If necessary, they can submit a new Form W-4 to reflect any changes.

Using the withholding calculator can help your employee perform a quick “paycheck checkup.” By checking their withholding, they can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time in 2019. It can also prevent employees from having too much tax withheld. Your employee may prefer to have less tax withheld and receive more in their paychecks. This may mean a smaller tax return when they file next year but the IRS says the average refund is already more than $2,800.

It’s also a good idea for your employee to conduct a “paycheck checkup” if they are just starting to work for you or had changes in their personal circumstances in 2018.

The IRS recommends the following groups perform a “paycheck checkup:”

• Two-income families.
• People with two or more jobs at the same time or who only work for part of the year.
• People with children who claim credits such as the Child Tax Credit.
• People who itemized deductions in 2017.
• People with high incomes and more complex tax returns.

To use the withholding calculator for a “paycheck checkup,” your employee will need to estimate their 2018 income and other items that affect their taxes, including the number of children claimed for the Child Tax Credit, Earned Income Tax Credit and other items.

Here are some other tips for your employee when performing a “paycheck checkup:”

• Gather the most recent pay stub from work.
• Check to make sure it reflects the amount of federal income tax that they have had withheld so far in 2018.
• Have a completed copy of their 2017 (or possibly 2016) tax return handy. Information on that return can help them estimate income and other items for 2018. However, the new tax law made significant changes to itemized deductions.
• The withholding calculator results are only as accurate as the information entered. If their circumstances change during the year, they should return to the calculator and make sure their withholding is still correct.

Again, your employee can use the results of their “paycheck checkup” to determine if they should complete a new Form W-4 and, if so, what information to put on a new Form W-4. There is no need to complete the worksheets that accompany Form W-4 if the calculator is used.

As a general rule, the fewer withholding allowances entered on Form W-4 the higher the tax withholding will be. Entering “0” or “1” on line 5 of the W-4 means more tax will be withheld. Entering a bigger number means less tax withholding, resulting in a smaller tax refund or potentially a tax bill or penalty.