Scrutinizing your pay stub sounds about as fun as burning your tongue, but in this case the pain can pay off. More than half of the U.S. workforce has experienced a problem with a paycheck at least once, according to a recent survey by think tank The Workforce Institute at Kronos, a for-profit workforce management software and service company. And some of those problems can involve payroll tax errors.
Here are three hidden payroll tax errors employers can make — and how you can spot them so you can get your money back.
1. Misclassification as an independent contractor
How it happens: Taxes are a pay-as-you-earn arrangement, so if you’re an employee, your employer typically withholds taxes on your behalf from each paycheck. But if you’re misclassified as an independent contractor, you’re on your own and have to estimate and pay the required taxes.
How to spot it on your paycheck: Your pay isn’t reduced by any taxes. That’s not a lucky break — if your employer isn’t withholding any taxes, you could face a huge tax bill in April, says Michael De Lucia, a certified public accountant and certified financial planner in St. Petersburg, Florida.
The fix: Confirm your status with your employer. If you’re indeed an independent contractor, start thinking about making estimated tax payments and begin tracking your work-related expenses so you can deduct them from taxes. If you disagree with how your employer has classified you, you can contact the Department of Labor, De Lucia notes. You also can ask the IRS to weigh in by filing Form SS-8.
2. Withholding taxes for the wrong state
How it happens: Many people live in one state but work in another. Some states have reciprocal agreements, which means you pay state income tax based on where you live instead of where you work. Check with your state’s department of revenue or income tax authority to see if it has any reciprocal agreements. Sometimes payroll departments could withhold taxes for the wrong state, though, and that could mean tax surprises in April.
How to spot it on your paycheck: The state income tax line on your pay stub has the wrong state’s name next to it.
The fix: First, stop the bleeding by reminding your payroll department that your home state and your work state have a reciprocal agreement, if that’s the case. Next, get ready to clean up the mess, which could involve chasing a refund from one state to pay the tax due to the other state. “For that particular year, you’re still going to have to file multiple state returns,” says Christi Bender, a CPA in Phoenixville, Pennsylvania.
3. Withholding too much in city wage taxes
How it happens: Many cities tax wages earned inside their limits. However, payroll departments often don’t keep track of which days employees work outside the city (at home, for example, or on business trips), Bender says. Employees end up paying the tax on all of their taxable wages instead of just the taxable wages they earned while working inside the city.
How to spot it on your paycheck: First, learn how your city taxes wages. Some cities might take a percentage of your federal or state taxes or a percentage of your gross earnings; others might impose a flat charge. Next, do a spot check. If you work in a city with a 3% tax on gross earnings, for instance, and you grossed $2,000 but worked outside the city limits during all or part of the pay period, the amount withheld from your paycheck should be less than $60 ($2,000 x 3%). If you worked outside the city for half that time, your city wage tax should be about $30.
The fix: “I would first go to the employer, because if you’re still within the same reporting period, they could always adjust your days worked in the city over the next two weeks,” Bender says. If that doesn’t work, file a wage tax petition or wage tax reconciliation with the city, she says. Like many tax mistakes, it can be a while before anyone notices anything. “This usually doesn’t come to light until the following tax year when the tax pro in your life looks at your W-2 and says, ‘Hey, this is screwed up,’” Bender says.
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