Payroll tables can be problematic in an insidious way throughout the year. There are two situations that you should be aware of-
First, those of you that have large swings in compensation from check to check can find themselves unnecessarily giving money to the IRS throughout the year. Sure you get it back as a refund, but some taxpayers want their money today. For example, let’s say your check at the beginning of the month is typically small and your paid 24 times a year, or semi-monthly (bi-weekly is 26 times per year). If your gross compensation is $1,250 for this check, payroll tables will assume that you are paid $30,000 per year which puts you in the 15% tax bracket.
Now let’s say your mid-month paycheck is relatively large due to monthly bonuses, commissions, etc. being tacked onto your base salary, and it is $5,000 in gross compensation. The payroll tables make the assumption that you are paid $10,000 per month or $120,000 for the year putting you into the 28% tax bracket. Come tax time, you earned $75,000 for the year but you withheld $20,596 in taxes but you should have withheld only $16,150, a $4,400 difference.
Again a $4,400 surprise, in the good way, can be nice in April. But you should be aware of this nuance. If you want to even out the tax consequence between paychecks, you might have to get cozy with your payroll specialist and have him or her make exemption changes between pay periods. Having your bonuses or commissions paid separately (a third check per month) can also help.
The other payroll table issue is the cousin to the easily forgotten marriage penalty (please see our upcoming blog post on the marriage penalty later), and it deals with disparate incomes between the spouses. When payroll tables are used to determine the amount of tax withholdings, they cannot predict or envision the other spouse’s income. So, if spouse A is earning $25,000 while spouse B is earning $100,000, spouse A will not withhold enough taxes when the incomes are combined since the payroll tables assume that spouse B earns a similar amount.
Specifically, spouse A will have withheld about $2,900 and spouse B will have withheld about $17,250. However, with the incomes combined the couple should have withheld $23,500 a shortfall of $3,350. This is a generalization, and your mileage may vary considerably because of deductions, credits, etc. but it is something to consider nonetheless. Proper selection of exemptions and additional withholdings can prevent a tax shock next year.
We can help you determine your withholdings, tax exemptions, etc. We will need to understand your goals with your tax return, such as large refund, small refund, owe nothing, etc., and we will also need copies of your most recent paystubs.