Many employers are dealing with employees questioning the amount (or lack thereof) of their tax refund this year.
Here’s what you should do when approached with questions from employees about their tax withholding:
Review the employee’s tax set up
- The payroll system calculates income taxes based on an employee’s filing status (taxes tab), pay frequency (rates tab) and their wages on each paycheck. Review their employee profile within the system to ensure all of these fields are accurate.
- If your employees are still using filing statuses and exemptions ( Single-2) in their tax setup, this means their withholding is based on an outdated W-4 and their withholding may not be accurate. The W-4 form was updated in January 2020 to reflect tax code changes from the 2017 Tax Cuts and Jobs Act, employees should use the IRS Tax Withholding Estimator to help them complete the new Form W‑4.
Remind your employees that their tax situation is personal
- When employees file their tax returns, their liability is based on combined income from all sources, including second jobs, investment income and a spouse’s earnings. Employees need to be sure they make adjustments to accurately account for, and reflect, their personal situation.
Explain that there were also some legislative changes that may have an effect on tax filing this year
- Advance child tax credit payments – The American Rescue Plan Act of 2021 increased the 2021 child tax credit to $3,000 from $2,000 per child age 17 and under, with an extra $600 for children under age 6. However, Millions of families received half of this credit via $250 or $300 monthly payments, from July through December of 2021, meaning they will have a smaller credit during tax time.
- Paused student loan payments – In March of 2020, the Department of Education gave borrowers the option to pause monthly student loan payments. Those that chose this option will have little to no student loan interest to write off this year.
- Unemployment Insurance – In 2020, millions received a temporary tax break which did not count unemployment benefits as compensation on their tax returns. Unemployment compensation is taxable in 2021.
Have your employees use the IRS Tax Withholding Estimator to help them complete the new Form W‑4 and estimate any applicable additional withholding. By using this tool, employees can align their withholding as closely as possible to their actual tax obligation.