The IRS launched an educational campaign early in 2018 known as the ‘Paycheck Checkup’. The point of the campaign is to encourage taxpayers to review their regular withholding in order to ensure they are not left with a tax bill come April. Taxpayers can take advantage of a free tool developed by the IRS specifically for this purpose. Having said that, the paycheck checkup does not apply just to company employees. It also applies to the retired and self-employed.
IRS officials have been encouraging both retirees and self-employed business owners to check how much they are setting aside for taxes given that the tax reform bill signed into law in late 2017 impacts them as well. According to Texas-based BenefitMall, the same calculator used by company employees can also be utilized by retirees and the self-employed.
The tool, which can be found on the IRS website, asks a series of questions relating to what the taxpayer expects to earn for the 2018 calendar year. It will then return an amount that should be set aside from each paycheck for income and FICA taxes. Of course, retirees and the self-employed do not get regular paychecks. But they are still paying income and FICA taxes out of their earnings. They can use the paycheck checkup tool to make any necessary adjustments.
Withholding for Retirees
BenefitMall explains that retirees typically receive income by way of pensions and annuity checks. Their income is taxable to a certain degree. With every payment there should be a statement detailing how much is being withheld to meet the taxpayer’s legal obligations.
In cases where retirees have additional sources of income not covered by payment checks – say self-employment income, for example – they are still required to pay taxes on that money. The free IRS tool created for the paycheck checkup allows that additional income to be included in the withholding calculation. It allows retirees to compare the number returned by the tool against what is actually being withheld from their monthly payments.
Withholding for the Self-Employed
Self-employed business owners are in a somewhat different situation. Rather than a payroll department withholding a certain amount for income and FICA taxes, the self-employed person is expected to set that money aside with every payment received. The money is then paid to the IRS by way of quarterly estimated tax payments.
Anyone making quarterly estimated tax payments can, if they choose, pay enough to cover the full payable amount from the previous tax year instead of attempting to estimate their income for the current year. If that minimum amount is paid, no penalties for underpayment will be assessed in April as long as the individual makes up any shortfall with his or her annual tax return.
On the other hand, some self-employed business owners prefer to make quarterly payments based on their own income estimates for the current year. The IRS encourages such taxpayers to use the paycheck checkup tool. The tool will help them better understand how much they should be setting aside for their quarterly tax payments.
Taxpayers Protecting Themselves
The IRS’ paycheck checkup represents an opportunity for taxpayers to protect themselves against unnecessary tax bills. But there is an added benefit as well. If the checkup determines that a person is having too much withheld, adjustments can be made to reduce that amount. This also protects the taxpayer by reducing the amount being given to the government in the form of an interest-free loan. That is reason enough to do the paycheck checkup, whether you are a company employee, a retiree, or self-employed.