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Is It Time for a Payroll Tax Checkup?
Article Highlights:
- Tax Reform
- Underpayment Penalties
- W-4 Modifications for 2020
- Withholding Estimator
- Penalty Abatement
This situation surprised many taxpayers, some of whom faced financial hardships because they depended on their federal refunds to cover other expenses, such as home property taxes.
Throughout 2018, the IRS issued nearly weekly warnings that the W-4 form and its corresponding withholding tables did not properly account for the tax reform’s changes, which caused the 2018 withholding amounts to be, in many cases, inappropriate. The problem was so widespread that Congress asked the IRS to waive underpayment penalties for taxpayers who ended up with a balance due but who had prepaid at least 80% of their 2018 tax liabilities. (Normally, taxpayers need to prepay 90% of their tax liabilities to avoid this penalty.)
Unfortunately, this problem will not be solved in time for the 2019 returns. Despite the problems in 2018, the IRS is waiting until 2020 to implement a new W-4 and to revise the accompanying computations so as to accommodate the tax reform’s changes. As a result, the problem of insufficient withholding will persist for many taxpayers in 2019.
We are now over halfway through 2019, so it may be a good time to double-check your withholding and projected tax amounts in order to prevent another unpleasant surprise at tax time. If you are conversant with tax terminology, you can use the IRS’s newly updated withholding estimator to do so. This online tool helps you to determine whether your employer is withholding the right amount of tax from your paychecks. However, be careful, as the results are only as good as the information that you put into the withholding estimator. You also have to estimate your income for the year from various sources.
Regarding the underpayment penalty, there are two points to consider. First, if you filed early in 2018 you and had tax due, then you may have paid an underpayment penalty because you hadn’t prepaid enough tax through either withholding or estimated tax payments. As mentioned earlier, the IRS allowed a special exception to the underpayment penalty for those who prepaid at least 80% of their 2018 tax liabilities. However, it didn’t establish the 80% penalty waiver until well into March, so those who filed early may have paid a penalty that they did not end up being liable for. To determine if you paid a penalty, look at line 23 of your 2018 Form 1040. If there is an amount on that line but you met the 80% minimum for the underpayment exception, you will be receiving a refund from the IRS. The IRS announced on August 14th that they will be automatically refunding the penalty to all qualifying taxpayers. There is no need to contact the IRS to apply for or request the waiver.
Second, don’t count on the IRS again lowering the underpayment penalty for this year; it has given fair warning to taxpayers, who have had many months to review and adjust their tax withholding amounts. If you need to increase your 2019 withholding, you should do so soon; the end of the year will be here before you know it, and spreading out the adjustment over a longer period results in the least amount of pain in your budget.
If you are self-employed or otherwise pay an estimated tax, if you have a complicated return, or even if you would just prefer to have a professional perform your tax checkup, please give this office a call to make an appointment.
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Get to Know Prestige Accounting Services Group (previously Prestige Wealth Accounting Group)
Offices in Flemington, NJ and Califon, NJ
Our Mission: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.
Expertise in Action: With a wealth of experience and a team of dedicated professionals, we specialize in individual and small business tax preparation. While we excel in all areas of taxation, our passion lies in serving the unique needs of small business owners in New Jersey. We understand that small business taxation requires specialized knowledge and attention to detail, which is why we go above and beyond to ensure our clients receive the guidance and support they deserve.
Tailored Solutions for Every Client: Whether you're a high-net-worth individual seeking comprehensive tax planning or a small business owner in need of accounting and bookkeeping assistance, we have the expertise to meet your needs. Our team takes the time to understand your specific situation and develop customized solutions that align with your goals and objectives.
Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.
Your Success is Our Priority: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we measure our success by the success of our clients. We are dedicated to building long-lasting relationships, providing unparalleled service, and helping our clients thrive in today's ever-changing tax landscape.
We can't wait for you to experience the Prestige Accounting Services Group (previously Prestige Wealth Accounting Group) difference.
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