One Out of Five Americans Is Going to Owe the Money to the IRS: Report

Here’s how to find out if you’re going to have to cut Uncle Sam a check.
A young couple reviews their taxes

Been living the good life with a fatter paycheck these past few months? Well, come next April, one out of five American taxpayers is likely to owe the IRS money.

Millions of Americans started receiving more money per paycheck after the Tax Cuts and Jobs Act went into effect early this year. While some of that surplus income is a direct result of the new law, a new report issued by the U.S. Government Accountability Office (GAO) found that employers may be underwithholding money for 21% of taxpayers.

The 30 million Americans who currently don’t have enough income withheld will have to cut a check to the government come tax time, rather than receive return. And in some cases, for instance if your amount due is greater than 10% of your total tax liability for the year, you may have to pay a penalty as well.

To help reduce the number of Americans who will owe a tax bill, the IRS is encouraging individuals to conduct a paycheck checkup with their income tax withholding calculator.

Is my employer withholding enough taxes?

To determine whether your employer is withholding enough, gather your most recent pay stubs and your most recent tax return. Then plug the information requested into the IRS's withholding calculator.

It's important to use real information, not estimates, if you want to get an accurate result. After answering all of the calculator's questions, it will tell you whether you're on track to underwithhold, overwithhold, or withhold the appropriate amount, and what changes you should make to your form W-4.

Explanation of Accurate Withholding, Overwithholding and Underwithholding

  • Accurate withholding: An employee’s total withholding allowance matches the total of the employee’s tax deductions and credits. As a result, the employee’s taxable income matches the amount of the employee’s pay subject to withholding. The employee does not have a balance due or receive a refund when filing a tax return.
  • Overwithholding: An employee’s total withholding allowance is less than the total of the employee’s tax deductions and credits. The employee will receive a refund when filing a tax return.
  • Underwithholding: An employee’s total withholding allowance is greater than the total of the employee’s tax deductions and credits. The employee will have a balance due when filing a tax return.
Source: Department of Treasury

In the scenarios examined in the GAO report, only 6% of taxpayers were withholding the appropriate amount of taxes. The remainder—nearly three quarters of the taxpaying population—were overwithholding.

While the 73% who overwithhold may enjoy the tax refund they get at the end of the tax year, overwithholding isn't something you should aim for. When you overwithhold and receive a big tax return, you're effectively giving the government an interest-free loan. But if you’re cash-strapped or living paycheck-to-paycheck, a little extra money each month could make a difference. That's why accurate withholding should be the goal of every taxpayer.

If you're unsure whether your employer is withholding the correct amount, or even if you received a large tax refund last year, conduct a paycheck checkup as soon as possible, so that the amount you owe can be corrected over your remaining 2018 paychecks.

Daniel Caughill

Daniel is a Staff Writer at ValuePenguin, covering insurance, retirement and other personal finance topics. He previously wrote about compliance and best practices for K-12 school districts at Frontline Education.

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