The 2016 tax filing season comes to an end on April 18. Late filers may still be owed tax refunds, however, and that’s great news for identity thieves, whose favorite pastime is stolen identity refund fraud, or SIRF.
SIRF would be less of a problem if employees weren’t so overwithheld in the first place, since fewer refunds mean fewer opportunities for tax scammers. Now’s the time to provide employees with a tutorial about their W-4 forms.
The truth about overwithholding. Most employees intentionally overwithhold on their wages because they’re expecting a tax refund the next year. There may be good reasons for overwithholding: a second job as a freelancer, one spouse being subject to the 0.9% additional Medicare tax, employees claiming the advance premium tax credit or taxable income from capital investments, for example. But even taking account of those reasons, employees are still overwithheld.
Tax refunds attributable to overwithholding aren’t extra money, even though employees tend to think of them that way. What’s really going on: Employees are advancing money to the federal government on an interest-free basis.
What employees should know about their W-4s. Employees filed their W-4s with you when they started work. Savvy employees may have refiled when they married or had children, but then forgot about them again.
Instead of lending the government interest-free money for a year, employees should use the worksheets that accompany the W-4 to align their withholding with their anticipated taxable income for the year. In addition to the worksheet on the front of the W-4, there are two on the back. Employees rarely flip the form over, so encourage them to do this.
If you can’t interest employees in reviewing their W-4s for accuracy, the IRS has a tax calculator on its website. To use the calculator, employees will need some basic information, most of which can be gleaned from their pay stubs:
- Whether they contribute to retirement or health plans on a pretax basis
- The number of their tax dependents
- Whether they take the child or dependent care credit
- Their wage and nonwage income
- How often they’re paid
- Their anticipated deductions.