​Say Goodbye to Tax Time Surprises with a Paycheck Checkup

As site coordinator of the Volunteer Income Tax Assistance program at The River Center, I have seen filers come away, reeling from the shock of large tax bills. Perhaps they didn’t understand their paystubs or tax liability. Maybe they had life changes such as a new child, divorce, or more jobs. These unwelcome tax time surprises could have been avoided by doing a paycheck checkup.

Paycheck Checkup Defined
When you do a paycheck checkup, you are checking your tax withholding amounts to ensure that you are paying the right amount of federal taxes. Your goal is to make the most of every dollar you earn. If you get a fat refund at tax time, this often means that you are having too much withheld from your paychecks, basically giving the government an interest-free loan. You could have used that money for household expenses or putting it into a savings account to earn interest. Underpay your taxes and you might owe money to the government, crushing your hopes of getting new tires, or paying bills.
Income Taxes 101
Income taxes are taxes on both earned income such as wages and unearned income such as interest and dividends. These are paid by both businesses and individuals and are used to pay for essential services that help maintain and improve our quality of life and ensure the proper functioning of society. The amount withheld from your paycheck depends on what your income is.
How are your tax withholdings calculated?
When you start a new job, your employer gives you a Form W-4 to complete. Your answers on this form let your employer know how much income tax to withhold from your paycheck. Since 2020, the new Form W-4 has done away with allowances and makes the adjustments to your withholding more transparent so you can understand how various factors impact your tax liability.
What the FICA?
If you receive a paycheck, you will have Federal Insurance Contributions Act (FICA) tax, also known as payroll tax, withheld. This is a set percentage of your income for Social Security (6.2%) and Medicare (1.45%) that is taken out of your pay each pay period. Your employer then matches that amount (7.65%) to equal the full amount of FICA tax (15.3%) sent to the government on your behalf.
Self-employed taxpayers and independent contractors
Working for yourself as a gig worker or housecleaner, for example, may mean freedom in many ways, but it also comes with the added responsibility of figuring your own tax liability. If you receive a regular paycheck from an employer, income and FICA taxes are usually withheld every pay period and sent to the government for you. If you are self-employed, you send in estimated taxes on a quarterly basis. If you don’t make these payments, you could end up with a huge tax bill. If your net earnings from self-employment are more than $400, in addition to income tax you must pay self-employment tax. This self-employment tax is equal to the full amount of FICA tax, 15.3%. You figure your income tax and FICA tax using a Form 1040-ES worksheet found on the IRS website.
W-4s are only as accurate as the information you give. Your employer is not going to know to adjust your withholding if you had any major life changes. This is why a paycheck check-up is crucial.
The how-tos of paycheck checkups
The IRS has a Tax Withholding Estimator on their website. To use it, you just need your most recent paystubs (your spouse’s paystub too), your last tax return, and information about any other income. Visit the IRS website to use the Tax Withholding Estimator at https://www.irs.gov/individuals/tax-withholding-estimator.
If you don’t have reliable internet service or you are wary of doing this on your own, the River Center is planning Paycheck Checkup Clinics this summer. Volunteers will help you use the Tax Withholding Estimator to see if you need to adjust your Form W-4. Visit our Free Tax Preparation webpage at https://www.rivercenternh.org/freetaxprep.html or email [email protected] to be notified of dates. You can also call us at (603) 924-6800 ext. 14 for more information.
If you are self-employed, you can use the Form 1040-ES worksheet found on the IRS website to calculate your tax liability. Our Money Matters programming is working on a fall presentation on self-employment tax basics so be sure to sign up for our newsletter on our website or check our social media to be notified.
Understanding your income and FICA taxes will help you make more informed financial decisions so you can plan for emergencies or set a reasonable budget for holiday gift-giving and avoid disappointment come tax time. Check your paystubs. Fill out a new Form W-4 if you need to adjust your withholding. Don’t wait until tax season to check. As the IRS says, “pay as you go, so you won’t owe.”

Author

Nisa Simila is the Communications and Money Matters Coordinator at The River Center.  Hailing from Canada, she came to New Hampshire after grad school and was a speech-language pathologist before becoming a parent. She has been a part of The River Center family for almost her entire life as a mom.