When Will I See Changes to My Paycheck Due To The Tax Law?

Many people are understandably interested in how the tax plan will affect their paycheck right away. Unfortunately, although proponents of the tax plan promised there would be immediate tax cuts, taxpayers may or may not see any benefits reflected in their regular paychecks. That’s because whether your paycheck changes now depends on a complicated calculation known as tax “withholding.” Tax withholding is a technical process that essentially pays your tax bill throughout the year as you earn income. Withholding allows you to pay your annual tax bill by taking taxes out of your paychecks, which lowers your immediate take-home pay, but is meant to prevent you from facing a big tax bill in April. The amount of your paycheck that is withheld for taxes is determined by tables the Internal Revenue Service (IRS) publishes.

If your taxes will decrease under the tax plan, you may receive a decrease in withholding and therefore a bump in your paycheck, enabling you to feel the benefit of your tax cut immediately. However, determining the correct level of withholding is complicated. The tax plan’s changes create a higher likelihood of errors with the withholding process, and given the complicated rules surrounding the new tax law – and how new it is – it is possible the withholding levels will need to be adjusted post hoc, and may result in an unexpected tax bill next year.

Many Factors Influence Withholding

Determining the appropriate level of tax withholding can be quite complicated. Factors that influence withholding include the length of a pay period, wage level, marital status, and the number of withholding “allowances” you can claim, which depends on factors such as family size, the number of jobs you have, and certain tax benefits you may be eligible for. Generally, the more tax benefits you are likely to be eligible for (and therefore the lower your tax burden will likely be), the lower your withholding will be.

Because withholding is so complex and the changes to the tax code are so recent, the IRS recommends that all employees use the withholding calculator on its website to double check whether their withholding levels are appropriate. Taxpayers may want to check the calculator and IRS guidance to employers and evaluate the number of withholding allowances they are claiming to ensure that their employers are not over- or under-withholding in their regular paychecks.

Withholding Tables May Not Apply to Individual Circumstances

Withholding tables apply to generic types of taxpayers, but may not reflect individual circumstances. For example, there are many circumstances in which withholding tables are less likely to accurately predict the appropriate level of tax to be withheld. These circumstances include taxpayers with multiple jobs, seasonal workers or those whose hours vary considerably over the course of the year, people with complex living arrangements, and people who benefit from particular tax breaks, like itemized deductions, education tax benefits, or child care tax credits.

The variability is especially pronounced this year because of the complexity of the changes in the tax code. For example, existing withholding allowances may be inaccurate because they are based on tax breaks that the tax plan repealed or reduced, such as personal exemptions or the full state and local tax deduction. These changes are all the more reason to double check your current withholding on your paycheck against existing and future IRS guidance.

Accuracy Won’t Be Known Until Next Year’s Tax Season

The accuracy of the new tax withholding tables, including any paycheck changes that occur immediately from lower withholding, ultimately won’t be known until taxpayers file their tax returns next year. There is a high likelihood of errors and unforeseen issues with the withholding tables given all the changes to the tax code that took place, which is why the IRS recommends you double check your withholding. The tax cuts taxpayers expect they should receive may not actually be correct when they file their taxes next year. The danger of reduced withholding is that you may receive a bigger paycheck right now, but you may owe higher taxes when you file your taxes next year. It is possible that what you see as a tax cut right now in your paycheck may in fact be just a loan, one that is due back next April 15.

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