Imagine that you have just taken up part-time employment and your employer has given you a much smaller pay check than you expected thanks to tax deductions and income tax withholding.
Such tax deductions are usually calculated as a proportion of your income, regardless of how many hours you work every week.
Based on the W-4 form submitted by you, the employer will compute the amount of income tax withholding. You can submit an amended W-4 form to the employer if you think the amount he is withholding is too much or too little.
Apart from federal taxes, local and state taxes may also need to be deducted from your pay check; the amount depends on the city or state in which you are employed. Federal taxes will account for three principle deductions. Your filing status (whether you file jointly with your spouse or choose to file singly) as well as your income will determine how much gets deducted. The 2018 tax year attracts tax rates ranging between 10 percent and 37 percent, recently amended from the different rates for tax year 2017 which ranged between 10 percent and 39.6 percent.
Social security taxes determine a 6.2 percent deduction from your pay check with effect from 2018. Medicare taxes account for an additional deduction of 1.45 percent. Your pay stub may show these deductions lumped under a single head called FICA taxes. After matching this amount, your employer is required to forward the deductions to the IRS. Federal income tax holding, another deduction, is usually the largest amount deducted.
An IRS formula determines the income tax withholding your employer will deduct based on a prediction of how much tax you will owe the IRS for a tax year. How much you have already earned during the year, what information you have submitted in your W-4 form (such as filing status and claimed exemptions), and what you are likely to earn in the current employment will all help determine the amount of withholding. Such calculation is likely to be accurate save for the possibility of your changing many jobs during the tax year.
You might want to ensure that your employer is not withholding more than he should, you can calculate the withholding amount yourself, using the IRS Withholding Calculator.
Based on your calculation you may find that your employer is not withholding the correct amount; in that case you can furnish a new W-4 form to your employer. Claiming additional exemptions will help reduce the amount of withholding. Likewise, fewer exemptions claimed would helped increase the amount of withholding. The form is available for downloading at the IRS website. You may also choose to use a tax calculator available on the Internet to compute the income from your part-time job.
If the employer in your part-time job fails to deduct any taxes, a possible reason could be the employer’s classification of your assignment as a contract job rather than regular employment.
While regular employees work under the direct control of their job givers, independent contractors don’t. They work according to a schedule of their own devising and use their own equipment. An independent contractor reporting income at tax time must owe both the employer’s and employee’s share of Medicare and Social Security taxes on his income, an amount that is twice that paid by an employee.
Preparation of a tax return will entail a review of the taxpayer’s financial position and enable him/her to plan for the upcoming year.
But a taxpayer who does not need to file a return as he is exempt from paying taxes would not want to allow any unnecessary tax deduction by his employer. Any such deduction would require the individual to wait till the end of the tax year for a refund of his money.
Form W-4 is accompanied by worksheets you can use to calculate how much withholding you need your employer to deduct from your pay check. Verifying the worksheets would allow you to ensure that you are doing an accurate job in computing the withholding amount. In case you are not sure about the calculation, you could seek the help of a tax consultant.
Advanced Accounting & Tax Planning