Withholding Surprises

39909000910_751bf52b33_bWith the passage of the Tax Cuts and Jobs Act that was enacted on December 22, 2017, tax rates and tax deductions were impacted starting January 1, 2018. Before the month of January was over, employees saw a change to their tax withholdings, with a majority seeing a little extra in their paycheck.

The law changes beginning in 2018 affect the tax returns that individuals will file in 2019. Some of the major changes impacting tax returns of employees are limiting the deduction for state and local taxes; excluding deductions for employee business expenses and miscellaneous itemized deductions; the disallowance of a deduction for personal exemptions; and an increase in the standard deduction.

Annually, the Internal Revenue Service encourages taxpayers to consider checking their tax withholdings. Reviewing the amount of taxes withheld can help taxpayers avoid having too much or too little federal income tax taken from their paychecks. Most taxpayers do not check their withholdings year to year because the amount withheld is typically sufficient to cover their annual tax liability. For 2018, this may be a mistake.

On May 16, 2018, the IRS issued an informational release (IR 2018-120) similar to prior years. However this release is warning taxpayers that with all of the changes in the new law, withholdings should be checked to avoid surprises. Each taxpayer’s tax circumstances are unique, and the IRS’s release is an urge to perform a “paycheck checkup” as soon as possible. Having too little tax withheld could result in an unexpected tax bill or penalty. If a taxpayer will lose deductions on their 2018 return, perhaps the little extra in the paycheck is going to compound their problems.

New York State labor law requires employers to notify employees of the rate of pay and the regular pay day designated by the employer. In addition, an employer must either post or notify their employees in writing of the employer’s policy regarding sick leave, vacation, personal leave, holidays and hours of work. There is no requirement at this time that employers send notices to employees about the changes in the rules governing individual income tax and their potential impact on their withholdings. Annually, the IRS and New York State simply ask that employees consider completing a new W-4. If a new or corrected withholding allowance certificate is not complete, the withholdings allowances from the prior year will continue. New York State also has their own withholding tax form (Form IT-2104) because they recognize the differences between New York State law and Federal Tax law can lead to different allowances. Not reviewing New York State withholding based on the changes to federal law may also be an error.

Since employees may be unaware of the necessity to review their withholdings, informing them of their need to check their withholdings could prevent misunderstandings should employees discover they are under-withheld when filing their 2018 tax returns. Employers may get a rash of complaints from employees blaming HR Departments of errors. It’s the employees’ tax liability, but the employer’s responsibility to withhold the tax. Early notification can help prevent misplaced complaints or withholding surprises.

Contact John Rosenberger, CPA at GKG CPA’s (jrosenberger@gkgcpa.com) to get more information on this topic or contact John to be added to GKG’s monthly electronic newsletter.