We’ve talked about ways you can adjust your withholding for a cheaper tax bill before, but what about ways to give yourself a better paycheck?
This year, the IRS’s annual study brought the average tax refund to be $2,700, which for some people, their first thought might be “great, more money to splurge on!” However, as those well versed on their taxes know, the opposite is actually true.
The way our nation’s taxation works is off a “pay-as-you-go” system. Every tax period, workers – regardless of industry – are paying their taxes either through quarterly estimated payments, or their employers withholding a certain amount from their paychecks. As the amounts add up, come the end of the year when your return is processed, either you’ll have paid too much taxes and receive the excess back in the form of a refund, or you paid too little and are then left with another tax bill.
Which means that when we come back around full circle to find that the average tax refund is $2,700? That’s $2,700 less that workers weren’t getting in their paychecks due to higher-than-necessary withholding – a big difference for moderate to low income families who tend to live paycheck to paycheck.
Why was the average refund clocked so high?
For some it could be a circumstantial change, such as getting married or the addition of a child, but for most, the Tax Cuts and Jobs Act (TCJA) of late last year has had the largest effect on tax returns that were much higher or lower than expected – reflecting the change our taxation system has been going through since the TCJA passed for 2018 and beyond.
Luckily, however, just like you can lower your end-of-year tax bill by adjusting your withholding, so too can you increase your paycheck amount by withholding less.
Check Your Withholding
All considered, while your taxes will ebb and flow with your financial situation and life, the goal is always to get back a small refund at every year’s end, as that means you’re paying just enough in taxes. And the first step to knowing how much is “enough”, is checking your withholding.
Enter the IRS’s Withholding Calculator; a handy tool to safely and securely calculate just how much withholding your employer should be taking each pay period.
If you find that the numbers don’t match, simply fill out a new Form W-4 with the updated withholding amount, and send it to your employer to request a change.
Fill Out Form 1040-ES
As self-employed taxpayers often don’t have a regular paycheck for an employer to withhold from (sole proprietors/partners can’t be on payroll), they pay their taxes through quarterly installments called estimated taxes.
Pay too much, and you lose out on cash flow that could have been available throughout the year (though it’s refunded back to you later). Pay too little or too late, and penalties can be applied.
Because of this, calculating the correct estimated tax payment can be a challenge – the TCJA especially enacting changes in how self-employed taxpayers calculate correct estimated payments. However, the IRS released a revised estimated tax package called Form 1040-ES to help brief you on those changes and ensure your estimates are correct.
And we always recommend speaking with your CPA to determine your true amount due since other factors besides your business can impact your tax liability.
The IRS’s online payment services, EFTPS and Direct Pay, are not only easy and free, but can also be configured to set up automatic estimated payments.
Never miss a payment again to snail mail and waiting for checks to arrive. Sign up for electronic payments via irs.gov/payments, phone, or on the IRS2go app.
Everyone has to pay their taxes, but no one should have to suffer financial hardship because of it. Do your research, seek counsel from a tax professional, and make the necessary changes to give yourself the tax breaks you deserve.