To avoid a tax surprise. And this year it is even more important. Most people who earn a salary or hourly wages had their paycheck withholdings updated in February. This incorporated tax changes from the 2017 tax reform package.
A mistake can put you at risk for an unexpected tax bill. Run your financial situation through a withholdings calculator to find out if you are on track, and if not make some changes.
How withholding errors happen
Take for instance this story: An employer makes a mistake in data entry and enters Ann’s exemptions from her W-4 as 5 instead of 2. This happens right away when she starts her new job. Ann fails to look closely at her first paystub and misses the error. Then, as the year goes along she doesn’t think to look again.
Once tax time rolls around, Ann plugs her W-2 numbers into a tax software program and uncovers a large tax bill. There is no way she can pay the full bill by April 15.
This is just one example. A rounding error or misplaced decimal can also cause serious issues.
Getting back on track
It can be difficult to come up with $3,000 or more to pay taxes. Earlier this year, the Federal Reserve found that 44 percent of Americans could not cover an $400 unexpected expense out of pocket.
The IRS offers payment plans that spread the re-payment over several years. You can generally apply for these online.
When a tax problem has been ongoing for several years, the debt can accumulate to the point you may never be able to pay it off. The IRS will consider an Offer in Compromise that effectively settles the full outstanding debt, penalties and interest for a lesser amount. You may need to be able to make larger lump sum payments, however, to qualify and you must have a sound reason for why you cannot pay the full amount.
Don’t let a tax bill sneak up on you. A mid-year checkup can spot any problems with enough time to fix them on the front end.