Why Is My True Up So High? Common Reasons Explained

A “true-up” in a financial context is an adjustment made to reconcile an estimated or provisional amount with an actual, final amount. These adjustments are common in various financial areas, such as insurance premiums, estimated taxes, and payroll. A true-up ensures financial records accurately reflect actual activities and obligations.

Understanding How True-Ups are Determined

True-ups are calculated by comparing initial estimates against actual figures over a specific period. For workers’ compensation insurance, premiums are initially based on an estimated annual payroll. The insurer uses this estimated payroll to determine the initial premium. At the end of the policy period, a true-up occurs where the actual payroll is compared to the initial estimate, and any difference results in an additional charge or a credit.

For estimated income taxes, individuals or businesses make payments throughout the year based on projected income and deductions. The Internal Revenue Service (IRS) requires these payments to cover expected tax liabilities. A true-up happens when the actual tax liability, calculated after the tax year ends, is reconciled against the total estimated payments made; if payments were insufficient, an additional amount is due.

Similarly, payroll tax true-ups reconcile estimated tax deposits with actual wages paid. Employers typically withhold and deposit payroll taxes based on employee wages throughout the year. At certain points, such as year-end, actual wages and corresponding tax liabilities are reviewed against the amounts already deposited. Any discrepancy between estimated and actual tax obligations necessitates an adjustment.

Common Reasons for a High True-Up

A true-up amount can be higher than anticipated due to several factors. For workers’ compensation insurance, a primary reason is actual payroll significantly exceeding initial estimates. This often happens when a business experiences unexpected growth, hires more employees than projected, or increases wages and overtime. Another significant factor is the misclassification of employees, where higher-risk job duties are incorrectly categorized as lower-risk roles. Changes in job duties or the acquisition of new employees in higher-risk categories can also drive up the final premium.

For estimated income taxes, both for individuals and businesses, unexpected increases in income can lead to a high true-up. This could stem from a substantial bonus, significant capital gains, or for businesses, landing a large new client. Failing to adjust estimated payments throughout the year after such income changes is a common pitfall. Underestimating deductions or credits, or experiencing significant life or business changes not accounted for in initial tax projections, can also result in an unexpected tax liability.

Payroll tax true-ups can be high due to incorrect withholding calculations throughout the year. If an employer’s payroll system consistently withholds less than the actual tax liability, a significant true-up amount will be due. Changes in employee benefits, such as taxable fringe benefits not properly included in gross wages, can also contribute to an underpayment. Misapplication of tax rules, such as incorrect calculations for Social Security and Medicare taxes, or errors in applying state unemployment insurance rates, can also result in a higher true-up.

Preparing for a True-Up Review

Preparation for a true-up review involves gathering and organizing specific financial documentation. Businesses and individuals should collect detailed payroll records, including payroll registers, employee earnings statements, and wage reports such as Forms W-2. For tax-related true-ups, this includes tax forms like Forms 1099, K-1s, and previous year’s tax returns. Income statements and expense logs are also essential.

Beyond standard financial statements, specific supporting documents are often required depending on the type of true-up. For workers’ compensation, this includes detailed employee classifications, job descriptions, and records of hours worked by each employee. Bank statements provide a comprehensive record of financial transactions. Contracts and agreements related to income streams or significant expenses should also be readily available.

Navigating the True-Up Process

Once the necessary information is prepared, the true-up process typically begins with initial contact from the entity conducting the review, such as an insurance auditor or a tax agency. This contact often involves a request for the documentation, which should be submitted promptly. During the review, the auditor or agency will examine the submitted records, comparing estimated amounts against actual figures to identify discrepancies. They may also request interviews to clarify specific transactions.

After the review, the entity will issue a final adjustment statement or bill. This statement will detail the calculation of the true-up amount, indicating any additional payment due or a credit. The statement will also specify the timeline for payment. If there are disagreements with the findings, avenues for clarification or dispute are generally available.