When the TCJA took effect at the beginning of 2018, the IRS updated the withholding tables employers use to determine how much money to withhold from employees’ paychecks. The new tables caused employers to withhold substantially less than they had in the past, which increased paycheck amounts. But this past tax filing season, many people were surprised to receive smaller refunds than they expected. This article advises that, if it’s necessary for employees to increase their withholding, it’s not a good idea for them to wait until the end of the year; it’s better to spread the additional withholding over as many paychecks as possible, so each paycheck bite will be smaller.

This past tax filing season, many people were surprised to receive smaller refunds than they expected. Some even had to write a check to the IRS. How could this happen? Wasn’t the Tax Cuts and Jobs Act (TCJA) supposed to reduce taxes in 2018?

The history

When the TCJA took effect at the beginning of 2018, the IRS updated the withholding tables employers use to determine how much money to withhold from employees’ paychecks. The IRS also encouraged taxpayers to use its withholding calculator (https://www.irs.gov/individuals/irs-withholding-calculator) to ensure they were withholding the right amount.

But an estimated 80% of taxpayers didn’t follow that advice. The new tables caused employers to withhold substantially less than they had in the past-a bigger decrease, in some cases, than was necessary to reflect the new tax law. As a result, most employees’ paychecks were higher last year, but many ended up with smaller refunds than in previous years-and some had to make payments with their 2018 returns, even though they typically had received refunds in the past.

The current picture

It’s a good idea to review your withholding amount at least once a year, and to revisit the calculation after any major life changes, such as marriage, divorce, the birth of a child or the death of a spouse. And if your 2018 refund was large or you owed money to the IRS, you should prepare a projection of your 2019 tax liability and adjust your withholding amount, if appropriate. (Keep in mind that a small refund is actually a good things, because it means you were making a smaller interest-free loan to the government during the year. )

Start by using the IRS withholding calculator. The tool will ask you to enter various items that affect your 2019 taxes, including your estimated income, the number of children you’ll claim for the child credit, and various deductions and adjustments. Based on the information you provide, the calculator will estimate your tax liability for the year and let you know whether your current withholding arrangement is expected to result in an under-or over payment. As you go through this exercise, consider whether any strategies, such as boosting your deductible retirement plan contributions or harvesting investment losses, are available to help you reduce your 2019 tax bill.

According to the IRS, the calculator is accurate for most taxpayers. But if your tax situation is complex (for example, if you owe self-employment tax, alternative minimum tax or tax on dependents’ unearned income-or you have long-term capital gains, qualified dividends or taxable Social Security benefits) or if you’re not comfortable with the results, consider seeking professional assistance.

If you expect an under- or over payment, adjust your withholding for the remainder of the year by completing a new Form W-4 for your employer, so that the total withhold roughly matches your expected tax liability.

This is particularly important if you have a projected underpayment, which can result in penalties. To avoid underpayment penalties (currently based on a 6% interest rate), you must pay through withholding or timely estimated tax payments, at least 1) 90% of your 2019 tax liability or 2) 100% of your 2018 tax liability (110% if your 2018 adjusted gross income was over $150,000).

If you anticipate an over payment, consider reducing your withholding or estimated tax payments to bring the over payment down to as close to zero as possible. While it may feel good to receive a hefty refund check in the spring, do you really want to be making that interest-free loan to the government? If you’re not ready to give up that annual “bonus,” there are better options available.

The future

If you believe a withholding adjustment might be necessary this year, the sooner you act, the better. If you need to increase your withholding, it’s better to not wait until the end of the year, when it may take a large bite out of the small number of paychecks you have left. It generally is better to spread the additional withholding over as many paychecks as possible, so each paycheck bite will be smaller.


Janet L. Osborn, CPA

As a Partner at Hancock & Dana with more than 30 years of experience, Janet provides insight for clients in the retail, manufacturing, non-profit and service industries. She specializes in tax research and planning, and IRS problem resolution.Prior to joining Hancock & Dana, she was employed with Coopers and Lybrand (now PricewaterhouseCoopers) and Arthur Andersen.