The IRS recently updated its 2019 federal income tax withholding estimator.
While the IRS generally encourages all employees to perform a payroll tax withholding “checkup” in the beginning of the calendar year, at this time of year it is especially important for employees to perform such a “checkup” in order to avoid any surprises when 2019 federal income tax returns are filed next spring.
To make matters more challenging, the passage of the Tax Cuts and Jobs Act of 2017 has resulted in several tax law changes that took effect in 2018 and that are continuing through 2025.
The IRS’ updated Tax Withholding Estimator helps employees identify an employee’s tax withholding to make sure that the right amount of federal income taxes has been withheld from an employee’s paycheck year-to-date during 2019. There are two reasons to check one’s federal tax withholding, namely:
(1) checking withholding helps protect against having too little tax withheld and facing an unexpected tax bill or penalty in spring 2020 when 2019 income tax returns are filed; and
(2) during last spring’s 2018 filing season, the average refund toppled to $2,800. Any employee who received a 2018 federal income tax refund of that amount may prefer to have less tax withheld from each paycheck throughout the rest of 2019 and receive more net pay.
Employees can use the Tax Withholding Estimator to determine whether they need to change their federal income tax withholding available on the electronic payroll processing such as “MyPay” or “Employee Express”.
Using the IRS’ Tax Withholding Estimator
The IRS’ updated Tax Withholding Estimator may be accessed by going here. A series of requests or questions will be asked to the individual using the Estimator; including:
(1) retrieve their most recent pay stubs;
(2) have a copy of their 2018 Form 1040 available which will help estimate 2019 income and speed up the process; and
(3) if any circumstances change during the rest of 2019, the estimator calculations should be redone to make sure that one’s withholding is still correct.
The Tax Withholding Estimator does not ask individuals to provide sensitive personally identifiable information such as one’s name, Social Security Number, address or bank account numbers. The IRS does not save or record the information entered on the Tax Withholding Estimator.
While the IRS’ Tax Withholding Estimator works for most federal employees, those employees with more complex tax situations should check out IRS Publication 505 (Tax Withholding and Estimated Tax), available for download at https://www.irs.gov/pub/irs-pdf/p505.pdf. In particular, information is available on paying quarterly estimated taxes. Paying quarterly estimated taxes in 2019 may be especially important for those federal employees who retired in late December 2018 and during the first half of 2019, as will be explained below.
What Are Estimated Tax Payments and Who Needs to Make Them?
Most employees do not have to worry about paying federal estimated taxes because they have federal income taxes withheld from their paychecks throughout the calendar year. But those individuals who are not employees (for example, self-employed individuals) do not have withholding taxes taken from a paycheck. Furthermore, if an individual owes more than $1,000 in federal income taxes at the end of December (which is likely if there has been no withholding during the year), the IRS requires that the individual make estimated tax payments – as many as four payments a year – rather than paying all the federal income taxes due on April 15th of the following year when the year’s income tax return is filed.
Federal estimated tax payments for 2019 are due April 15, 2019, June 17, 2019 (June 15, 2019 was a Saturday), September 16, 2019 (September 15, 2019 is a Sunday), and January 15, 2020. The challenging part of making estimated tax payments is figuring out how much to pay with each payment due. This is particularly challenging the first year an individual has to make estimated tax payments. The IRS says that for most individuals, if the total of estimated tax payments made during the current year equal at least 90 percent of the total tax liability in that year (or at least 100 percent of the tax liability of the previous year), then the IRS will not impose an underpayment penalty for that year. That means that using last year’s tax liability as the amount to pay for estimated taxes in the current year will be the recommended way to pay 2019 estimated taxes.
The following example illustrates the need to pay federal estimated tax payments during 2019. It involves the case of a federal employee who retired on Dec. 31, 2018:
Joan, age 65, retired on Dec. 31, 2018 under FERS with 33 years of federal service. At the time of her retirement, Joan had 400 hours of unused annual leave. Joan is retired and not working in 2019, and has non-retirement investment income consisting of interest, dividends, and capital gains totaling $30,000 during 2019. Joan wants to know whether or not she should pay estimated taxes during 2019.
There are some income-related and tax withholding items that Joan should be aware of before the question of whether or not she has to pay estimated taxes during 2019 can be answered. These items are:
- Joan received two paychecks in January 2019 – a full paycheck for pay period 25 (ending December 22, 2018), and the other for five days of pay period 26 that she worked before retiring on December31, 2018. Federal (and state) withholding taxes were withheld from both of these paychecks and these paychecks were dated in January 2019.
- Joan’s SF 50 salary during leave year 2018 was $100,000; her hourly wage rate was therefore $100,000/2087 hours, or approximately $50 per hour. With 400 hours times $50/hour or $20,000 was her lump sum payment for unused annual leave. Federal and state income taxes, and Social Security (FICA) and Medicare Part A (Hospital insurance Tax) were withheld from that lump sum payment which was also dated sometime in January 2019.
- Joan subsequently received six “interim” FERS annuity checks, dated February 1, March 1, April 1, May 1, June 1 and July 1, which were approximately 60 percent of what Joan was supposed to have received. Some federal income taxes, but no state income taxes, were withheld from Joan’s six “interim” FERS annuity checks.
- On August 1, 2019 Joan received her first full FERS annuity check. OPM added to that first full FERS annuity check what was not paid to Joan for each of the six “interim” annuity checks. Federal and state income taxes were withheld from the August 1, 2019 check.
- Joan decided not to start receiving her Social Security retirement benefit during 2019, as well as her TSP.
Joan has no idea as of Sept. 1, 2019 as to what her total federal income tax liability for 2019 will be. She should look at her 2018 Federal tax liability and use that as a basis as to how much she should pay during 2019 in federal income taxes via withholding and estimated tax payments. In so doing, Joan will avoid paying an underwithholding penalty for 2019.
Suppose Joan’s total 2018 federal tax liability was $30,000. Joan determines that she has had withheld from her two paychecks and lump sum payment for unused annual leave hours (received in Jan. 2019) and the six interim annuity checks received from Feb. through July 2019, a total of $20,000 during 2019. Joan therefore should pay a total of $30,000 less $20,000, or $10,000 in federal estimated tax payments during the rest of 2019. Since there are two estimated tax payments remaining in 2019, Sept. 16, 2019 and Jan. 15, 2020, Joan should make an estimated tax payment of $5,000 each time. In so doing, she will avoid an underwithholding penalty for 2019.
If Joan lives in a state with a state income tax, then she should use the same procedure, paying estimated taxes to the state in which she is a legal resident.