Payroll Withholdings: A Warning to Dual Income Households

November 24, 2018 Author: Joe Paulson, CPA, Partner, Compass Pointe CPAs

Compass Pointe CPAs Greenwood Indianapolis Indiana

In December 2017, the House passed the Tax Cuts and Jobs Act, which brought about the most sweeping tax reform since the 1980s. The bill includes significant tax law changes for both businesses and individuals. Because of the breadth and depth of the various tax law changes brought about by the Act, it is difficult to efficiently and effectively discuss the impact of these changes on all circumstances in just one or two paragraphs. This is part of an informative and meaningful series to help you understand how the Act impacts your business or individual tax situation.

This is a warning to households for 2019 where both spouses derive W-2 wages. You may want to check your pay stub! 

There are two reasons why:

  • The Act increased the standard deduction for taxpayers filing as married filing joint; and 
  • The Act adjusted graduated income tax rates. Because of these two changes, the IRS adjusted the calculation and formula for payroll withholdings.

Typically, employers gather the information needed to calculate federal payroll withholdings on Form W-4, Employee’s Withholding Allowance Certificate, on an annual basis. Here is the kicker: if you and your spouse fill out the W-4 checking the box “Married” on Line 3, then each of your employers is giving you the new increased standard deduction of $24,000 in each of your withholding calculations. 

Instead, you should each be getting $12,000 in the calculation. Thus, you may be surprised to find you are under withheld.

So, what do you do to mitigate this issue? Here are some helpful hints:

  • Talk to your human resources team and increase your federal withholdings (either by percentage or just give them a dollar figure).
  • Fill out a new W-4 and check the box “Married, but withhold at higher single rate” on line 3.

For more information, contact Compass Pointe CPAs at 317.881.6670.

Related Series on Tax Cuts and Jobs Act

IRA Required Minimum Distributions Meet Qualified Charitable Distribution

Depreciation: Why You May Not Want to Expense It All At Once

Qualified Business Income Deduction: Complicated Yet Impactful

Tax Act: Things That Went Away and Some That Didn't

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