Tax Day is just around the corner and, after a year of major policy and legislative changes, filing taxes may seem more confusing this year than previous years. Not to mention, roughly 36% of taxpayers decide to wait until April to file their returns. For these reasons, we developed a guide of the most important things for employees to consider as April 15th approaches. From the basics of W-2s to the intricacies of the Tax Cuts and Jobs Act, here are 4 critical things that employees need to know to tackle the 2019 tax season.
A W-2 form, otherwise known as the “Wage and Tax Statement” details an employee’s compensation from their employer. Each year, any employee who made over $600 working for an employer will receive a W-2, typically in the mail. The information on this form is critical – it dictates whether an employee will be getting a refund or paying additional fees come April. In order to file their taxes, employees must have a W-2; contractors or freelancers will have a Form 1099 in its place.
While W-2s mainly show employee earnings in wages and tips, they also detail other important information, like retirement plans, health insurance payments, and dependent care benefits. All of this data impacts employees’ larger tax picture.
Withholdings are a certain portion of an employee’s paycheck that are deducted and allocated to various programs, such as Social Security, Medicare, retirement, health insurance, and of course, taxes. These percentages are calculated based on information from employees’ W-4 forms and can vary drastically from person to person. Unlike a W-2, W-4s are internal documents that inform payroll departments of how much tax to withhold from an employee’s earned income.
It’s important for employees to review their withholdings annually for several reasons. If they married or divorced in the past year, they must change their filing status accordingly. The same goes if they have a child – their tax obligations can change based on their number of dependents. Additionally, if they’d like to reduce their big tax refund and instead receive stipends of that money throughout the year in their paychecks, they should revise their W-4 as well.
2018 marks the first year that employees will be filing under the latest changes to the tax code, referred to as the Tax Cuts and Jobs Act. This overhaul of the tax code resulted in numerous changes that will impact a wide variety of employees. Notable new initiatives include:
Filing taxes comes with a sense of relief for most – but there are a few minor, yet crucial, steps that everyone should be taking to set themselves up for success next year. First, employees should ensure they make copies of their 2019 tax return, as well as copies for their spouse or dependents if applicable. It’s helpful to set up a filing system to start preparing now so they’re not stuck sifting through mountains of paperwork next year. As they receive documents throughout the year, such as receipts for deductible expenses, they’ll be able to easily keep track of them.
Next, as previously mentioned, they should consider whether their filing status is likely to change within the next year and make the appropriate updates to their W-4. Employees who received a large return should consider decreasing their withholdings. This provides them with access to money throughout the year that they can spend, save, or invest over time.
Finally, employees with a 401(k) or IRA could be eligible for a tax break if they contribute more to their retirement in 2019. While there are income restrictions, contribution limits, and deferral limits that may apply, contributions to retirement funds are typically deductible on their tax return. Employees should have a full understanding of their own unique situation and how much they’re able to contribute over the course of the year.
Filing taxes doesn’t have to be an overwhelming or stressful experience for employees, even with major changes to the tax code. By utilizing this guide, you’ll be equipped with the knowledge and guidance necessary to successfully tackle the 2019 tax season.