Think back to what you were doing at the start of 2020. And when you have that image, compare it to what life is like now. The takeaway from this, amongst other things, is that a lot can change within a year.
And that is exactly why we are here to discuss a paycheck checkup.
For anyone who is not familiar with the term, a paycheck checkup is when you revisit your tax withholdings. As someone who uses 123PayStubs and is an employer, you should encourage your employees to do one.
Remember that the purpose of you withholding money from your employee’s paychecks is to ensure that they have enough set aside to pay their annual income taxes. Holding too much is keeping money away from your employees and too little ensures that they have to pay out the balance to the IRS.
A paycheck checkup is a means for them to go back and reconsider their deductions. Major life and job changes will have an impact on your employees’ taxes. Have them update accordingly.
Reasons To Do A Paycheck Checkup
Second Job – If your household has two more jobs, then it is highly likely that you will be directly impacted by new tax laws. This pertains to one person have multiple jobs or two people have one job apiece. If there is new tax legislation, conduct a paycheck checkup to ensure your deductions still apply.
Seasonal Work – Certain companies will hire additional employees during different times of year because their workloads increase. For example, think of delivery personnel during Christmas or small shops in a tourist town in the summer. The key to seasonal work is understanding that incorrect deduction adjustments to part-time work tend to have more of a significant impact than they do on full-time workers.
New Children – When personal taxes were overhauled in 2017 with the Tax Cuts and Jobs Act, there was a major change to the Child Tax Credit. Secondly, it is also important to note that personal deductions also changed. There were people who held onto every job-related receipt as evidence to use towards their deductions.
The standard deduction doubled due to the Tax Cuts and Jobs Act. It may be more valuable to take the standard deduction than to do an itemized one.
Adult Dependents – Like above, people would claim their children as dependents for tax credits. This would end when the child became an adult. Though you can no longer claim them for the Child Tax Credit, these same people may fit into the Credit for Other Dependents. If one of your children left one category, they may have entered another.
High Income – The more money you make, the more complex your annual taxes tend to be. If you fall into the “High Income” category, you would be well advised to conduct a paycheck checkup. High Income is defined as a single person making $163,301, or two people (filing jointly) making $326, 601. A good rule to live by is the simpler the return, the less impact that new tax laws will have on you.
High Refunds and High Bills – When people received their first refunds based on the new Tax Cuts and Jobs Act, they were lower than in previous years. At first, there were claims that they’d been told that the Tax Cuts and Jobs Act would lessen their taxes.
And it did. However, people judge taxes based on refunds. Because they paid less, they received less. Other people paid large tax bills mostly because not enough money had been withheld throughout the year.
Take this as a learning point: if you had a high refund or a high tax bill, go and do a paycheck checkup. Ensure that your deductions still fall in line with the most recent tax overhaul.
For instance, if one of your employees has gotten married, congratulate them and recommend a paycheck checkup. Their filing status has changed. He or she will no longer be submitting their taxes as single. You can read more about that here.
The best way to get ahead on your taxes is to never find yourself playing catch-up during the 25th hour of tax season. Document what you pay out as it happens. When tax season arrives, your finances will be in line and ready for entry.