Every year, without fail, we talk to people who did not have their tax withholdings set up properly and were either grossly overwithholding or grossly underwithholding. Clearly, the former would be more beneficial to the taxpayer because they would get a refund for the overpayment.
However, with underwithholding, it’s not a fun surprise when that tax bill is due! It’s also possible for the IRS to impose penalties on top of taxes owed, if the underwithholding is drastic.
How common are pay stub errors?
It’s estimated that only 6% of taxpayers had taxes accurately withheld from their paychecks in 2018, according to the US Government Accountability Office1. This means that only a small fraction of taxpayers had the exact amount of taxes they actually owed withheld.
This small minority of taxpayers did not owe any taxes or receive a refund when they filed their taxes. Sure, many people say they enjoy getting a tax refund. But, that’s a topic for another day.
We also see situations where other deductions are not properly calculated, such as 401k contributions, health insurance premiums, and so on.
It’s an alarming statistic that over 50% of employees in the US have experienced an error on their paycheck at some point, according to a 2017 survey from The Workforce Institute at Kronos Incorporated2. And this is only the errors that have been noticed.
Reviewing your pay stub
So, what can you do? The first thing step in evaluating your withholding is to carefully review your pay stub. This will give you a breakdown of everything that is being deducted.
Some things to look for are:
- Federal tax withholding: is the withholding amount too much or too little?
- State tax withholding: is the withholding amount too much or too little?
- 401(k) withholding: double check that the percentage or fixed amount matches what you elected.
- Health insurance withholding: if you have a plan where you are responsible for some or all of your insurance premium payment, make sure that the amount being withheld corresponds to the plan you chose.
If you’re unsure how to determine what your state and federal tax withholding should be, reach out to your tax advisor for assistance.
How to fix an error on your pay stub
If you find that your federal and/or state tax withholding is causing you to be overpaying or underpaying annually, you’ll need to complete a new Form W-4 for federal taxes and the appropriate state form for your state taxes. There are detailed instructions to help you complete the forms.
For 401(k), health insurance, or other benefit withholding issues, make sure to contact your human resources department for help.
Bottom Line
Pay stub errors are relatively common, unfortunately. A number of errors can occur while manually entering employee information into a system and processing payroll.
It’s important to review your pay stub carefully, as well as review future pay stubs regularly to ensure they’re accurate. If something looks wrong or you’re not sure what your withholding should be, check with a tax advisor and/or your HR department.
At the end of the day, if your pay stub does have an error and you as the employee don’t catch it, it’s likely that no one will.
Sources: 1 USGAO 2018 report, 2 CNBC
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