Are your tax withholdings right? How to check with a calculator — and fix your 2018 paychecks

If you’ve followed conventional wisdom and filed taxes early this year to get the ball rolling — and avoid a predicted spike in tax refund fraud — a check from Uncle Sam should be on its way. In fact, filers who submitted extra early might feel flush already, while those who file right under the wire by the April 17 deadline should get refunds by early May, according to estimates from Forbes.

But even if your tax forms are filed and out the door, there’s still one final step for next year that you may have neglected, particularly in light of new tax rules: making sure your employer is withholding the right amount of cash from each paycheck to keep you on track for the coming year.

More than 70% of people tend to get tax refunds, the IRS estimates. And while freelancers or the self-employed pay taxes quarterly, most full-time workers pay taxes through withholdings, wherein the government collects the money straight from employers — meaning most people are withholding too much.

The IRS suggests people shoot to have about 90% of their overall tax burden withheld from their paychecks over the course of the year to avoid underpayment fees. You need to balance two different risks: underpaying and facing penalties and overpaying and making a long-term, interest-free loan to the government — with money that could be put to better use, as Investopedia notes. Most filers overpay by about $3,000, the size of a typical refund.

Though refunds are fun to get (and helpful if they incentivize you to save extra cash) you’re giving up the potential return you’d get on your cash if you got it sooner and saved it, for example, in an interest-earning or investment account. Then again, those who owe taxes in the end tend to cough up roughly $7,000, hardly the kind of bill you want to be slapped with unexpectedly.

In other words, the ideal is to get your tax withholdings just right.

Here’s how to figure out if you’re having the correct amount withheld, considering earnings and household size — plus what to do if you’re not.

Why should you check on your tax withholdings today?

It’s particularly important to have the right withholdings in 2018 because it’s a transition year between the old tax code and the new one instituted by the Tax Cuts and Jobs Act. According to Morningstar, the groups most likely to find themselves with the wrong withholding amounts include two-income households, people with two jobs, households with children or that claim the child tax credit, people who itemize their tax deductions and high earners with otherwise complicated returns.

But even if you’re not in those groups, your withholdings might need to change if you undergo a life event like getting married, having a kid, changing (or losing) a job and getting a raise: With a new dependent or tax bracket, it’s likely you’ll need a new amount of tax withheld from each paycheck.

How do you choose the right allowances? Is there a tax withholding calculator?

When you started your current full-time job, you filled out a W-4 form telling your employer how much of your paychecks should be directed toward taxes.

If you suspect your current withholding is not correct and want to take a second look at the paperwork, focus first on line five, where you input the total number of “allowances” you’re claiming, as you can see in the below screenshot of the IRS form.

How few allowances you claim is up to you: You could claim none, which would mean smaller paychecks and a big refund come tax time. But someone with no children and one job would likely be able to claim up to two allowances, according to SmartAsset.

Once you’re in a two-income household and start to factor in dependents like children, it makes sense to use a withholding calculator to figure out what’s right for you. The IRS recently released a new withholding calculator of its own for 2018 which you can fill out here.

To answer all the questions, you should have a copy of your 2017 tax return and your most recent pay stubs handy.

What should you do if your paycheck’s tax withholdings are wrong?

If you’d like to have more or less money withheld from each paycheck — or think you’ve spotted an error — all you need to do is inform your human resources or payroll team member and ask them to issue you a new W-4. If you’re hoping to make their job a little easier, you can also download and submit a copy of your own using this link.

Don’t forget to consider state and local taxes, which can be unexpectedly high, depending on where you live.

Your HR or payroll rep might be able to help if you suspect your state and local tax withholdings are incorrect, but are not sure.

In the end, if you still get a refund check (hopefully not a huge one), at least consider using it to fund a hard-to-reach savings or retirement account — so it’s there for a rainy day.

For more about how to keep more of hard-earned cash during tax season, check out our guides to avoiding scams, maximizing your tax breaks and filing as a freelancer.

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