With the summer vacations kicking in, we bet most of you are ready to start your summer jobs. Pursuing a summer job speaks volumes about your enthusiasm to support your education or to make a pathway to pilot your passion or dreams.
But before you step on the gas pedal have you done your research on the tax implications of the income from your summer job? If not, then no worries. Just read on to get all the handy tax tips that will prove essential to you being able to retain the maximum amount of your hard-earned dollars this summer.
Know the tax-free threshold?
The annual tax-free threshold is $12,200, and anything equal to or below this amount is not subject to federal taxes. Keep in mind to claim EXEMPT on your Form-W4 which will prevent your employer from withholding any federal tax from your paychecks.
Fill the Form-W4
Did you know that your employer is liable to withhold a part of your income as a federal income tax?
For most of the first timers, be aware that your paychecks wouldn’t totally be yours for the taking as your employer is liable to withhold a federal tax from it to pay to the IRS. This is where the Form-W4 comes into the picture. Finding and filling this form through the Withholding Calculator on the IRS website will help you ascertain just how much federal tax your employer can withhold from your salary. Moreover, you can generate the Employer’s Withholding Allowance Certificate, which will allow both you and your employer to make informed decisions about the payable federal tax on your earnings. This way, your employer need not withhold an excess amount from your salary each month.
What is your job forte? Are you planning to do a job or be self-employed?
Whether you are working at the local Starbucks or doing something on your own such as babysitting or conducting coaching classes, the IRS will tax your earnings. For those who are not self-employed, ensure that you fill in Form-W4 so that your employer deducts the right amount of taxes from your income as per the tax rules laid down by the IRS. A point to keep in mind is that even the tip that you receive is taxable, and shall be reported to your employers if it equals or exceeds more than $20.
For, those of you who are self-employed and earn more than the tax threshold, you need to make quarterly estimated tax payments directly to the IRS using the Form 1040-ES. In addition to the federal tax and state taxes, you would be liable to pay a self-employment tax at the rate of 15.3% on your total earnings.
How are payroll taxes different from other deductible taxes?
Payroll tax is the tax paid for the Social Security System. This is a distinct type of tax payable to the IRS in the sense that it does not consider the tax threshold. No matter how little you earn, your employer will mandatorily withhold the Social Security and Medicare tax from your paycheck and make an equal contribution to the IRS for the same amount.
For those of you, who are self-employed, be informed that you need to pay this tax directly to the IRS.
Do you get a bountiful financial aid package?
For those of you who receive a good amount of financial aid from your family or a scholarship or a grant-aid for your education, there is something called as the non-tuition assistance which is used to pay boarding and other miscellaneous expenses. Such non-tuition assistance is liable to be taxed at the rate of 37 percent, even if your family income tax rates are much lower than this. Well, this tax reform is still under debate and is facing a lot of criticism for the unfair tax burden laid on students from low-income groups.
The reason for enforcing taxes on non-tuition assistance was to stop rich parents from evading tax by simply transferring a large amount of money to their wards.
The Crux of all this?
Doing a summer job is quite commendable, but it’s essential that you learn all about how you can make big savings on your tax liabilities. So, make sure to make the most of your summer job by taking informed and conscious tax decisions to increase your earnings.
For more such tax news and updates, stay tuned with MyTaxFiler. We also provide a one-stop solution for all your tax-related woes. Simply drop a mail at firstname.lastname@example.org or call us at (888)-482–0279 for an on-call consultation.