Is It Time for a Paycheck Checkup?

This time of year, our tax blog always gets a bit sentimental. We start talking about saving strategies for the New Year, showing you how to make last-minute money moves to lower your tax bill, and sharing neat tools to help you get a handle on your taxes. But this isn’t one of those articles. This is about the paycheck checkup.

Tax problems don’t magically spring out of thin air. Usually, they’re the result of a simple mistake, a lack of organization, or a tendency to enter tax seasons unprepared. We can usually blame it on misreported income, unfiled tax returns, and unexpected tax bills—the big kind, bills you just can’t pay all at once.

Fortunately, autumn and the months surrounding the tax extension deadline make for a perfect window to take a closer look at your tax situation and get a head start on the new tax year!

We think it’s time for a paycheck checkup.

What Is a Paycheck Checkup?

Think of a paycheck checkup like you picture a checkup with your doctor, your dentist, or even your auto-mechanic. You’re going to take a look at your paychecks and general financial situation and make sure your tax withholding looks about right—or if you should take action.

What Is Tax Withholding?

When you aren’t a self-employed worker, your employer takes a portion of each paycheck and sends that to the IRS and state tax authorities. Your withheld income is typically summarized on any paper pay stubs or paychecks, along with other totals your employer may handle, like regular retirement contributions or health insurance.

Your withheld income is estimated based on how you fill out your W-4. Unfortunately, most people deal with the W-4 so infrequently—maybe every couple of years—that they don’t really understand how filling it out affects their taxes. So, they fill it out and only discover something’s off when they end up with an unexpected tax refund.

Or an unexpected tax bill.

Even more often, the details of your life change over time. You may get married, get divorced, have a child, or have a child who has ventured off into the world and doesn’t qualify as a dependent anymore. These all directly influence how much more of your paycheck the IRS allows you to keep. When life happens, your withholding needs to adjust; if it doesn’t, it could throw you off course come tax season

How Do I Perform a Paycheck Checkup?

Let’s go back to the doctor metaphor.

The average person should visit the doctor about once a year, unless they’re experiencing some sort of health event. In that case, it’s good to go in for a checkup anyway. Similarly, it’s a smart plan to check in on your tax withholding once a year, or if something big happens—like if you get married.

If your doctor sees anything they think may be off, like high blood pressure low blood sugar, they can get you back on track—by prescribing medicine or exercise. Similarly, if you see something off with your tax withholding, you can update your W-4 with your employer.

The more regularly you pay attention to your health, the more likely you are to avoid a health issue. With a paycheck checkup, you’re more likely to avoid a big tax bill. And you won’t leave money with the IRS that you could have used earlier.

Try the Tax Withholding Calculator!

The IRS doesn’t want you to run into tax withholding troubles, either. They’ve created a free tool on their website to help you perform your paycheck checkup. That tool, the Tax Withholding Estimator is always updated to reflect current laws.

Here are the IRS’s instructions for using it:

1. Gather the most recent pay statements for yourself, and if you are married, for your spouse too
2. Gather information for other sources of income you may have
3. Have your most recent income tax return handy
4. Use whole dollar amounts in the estimator

The Tax Withholding Estimator can give you an impression of the accuracy of your current tax withholding. If you discover your allowances are off, you can get started updating your W-4!

A Reminder: Results are only as accurate as your information. If you forget to input your spouse’s income, neglect to include a dependent, or do too much rounding, your results may not be accurate.

Paycheck Checkups: They’re Good for Your Health.

We could all afford to be more in tune with our finances. By regularly checking in with your tax withholding, you can carry yourself with confidence when tax season rolls around. You’ll make decisions based on your financial goals, and you’ll give yourself—or your tax preparer—an even better chance at giving yourself a healthy tax refund.

Who doesn’t want that?