This is a post for people who are dependents and who have summer jobs as their only source of income.
If you will earn under $6350 for the year at a W-2 job, and you have no other sources of income, and you did not have any tax last year, you can use Form W-4 line 7 and write "Exempt" to prevent any federal income tax from being taken from your paychecks. That's because if you earn under $6350, your standard deduction amount as a dependent will be greater than your income, so you won't have taxable income and won't owe federal income tax.
But if you will earn over $6350, or you did have tax last year, you are not allowed to use the line 7 "Exempt" option. You need to figure out what allowances figure to write on Form W-4 line 5 so that the amount of federal income tax that gets taken from paychecks is not too much.
If you simply follow the instructions for Form W-4 without considering that you are earning for only part of the year, you might find it suggesting that you use "1" allowance on line 5 if you are a dependent. This is likely to take out too much withholding if you are only working part of the year.
Any amount beyond what you actually owe as federal income tax would get returned to you as a refund when you file your taxes, but perhaps you'd like to not overpay in the first place and would rather see more take-home pay in your paychecks. If so, the material below helps explain why you can use a larger allowances number and how to figure it out.
Let's suppose you're earning $600/week and are getting paid biweekly. For example, you might be working 30 hours at $20/hr or you might be working 40 hours at $15/hr. Also, let's say you will be working 14 weeks during the summer, so you will have 7 biweekly paychecks.
First, let's look at what your actual federal income tax will be.
gross wages = $1200 biweekly * 7 paychecks = $8400
Your standard deduction as a dependent with more than $6350 income is going to be $6350. This is an amount that will not be subject to federal income tax.
taxable income = $8400 – $6350 = $2050
You'll find your income tax by using a tax table. Your first $9325 of taxable income get taxed at 10%, so your income tax would be $206. (You might think it should be $205, but anyone in the $2050-$2075 range gets taxed as if their income is the midpoint, $2062.50, and 10% of that rounds to $206.)
So if your income tax is $206, and you have 7 paychecks, you would want to have $29 or $30 taken from each paycheck.
What happens if you simply use 1 allowance on your Form W-4, as the lines A-H imply?
The withholding algorithm works by looking at your paycheck gross and multiplying it by the total number of paychecks you would get in a full year. It uses that value as an estimate of your annual income.
$1200 biweekly * 26 paychecks = $31200
The algorithm them calculates what the taxable income would be for such an earner, based on the allowances number provided on the W-4.
taxable income = $31200 – $6350 = $24850
Then it figures out the income tax on the taxable income. It uses $24875 as the taxable income, because anyone with taxable income in the $24850-$24900 range is treated as if they earn the midpoint of that range.
tax on $24875 taxable income = 10% * $9325 + 15% * $15550 = $932.50 + $2332.50 = $3265
The algorithm then supposes that if $3265 is your total tax for the year, you should pay $3265/26, or about $126 per paycheck, which means about $879 total across 7 paychecks.
So, if you were to write "1" allowance on your Form W-4, you'd find that about $126 will be taken out of every paycheck.
But you really need only about $30 taken out of every paycheck, because your annual income is a lot less than $31200.
Key idea These two numbers are NOT the same:
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7/26 of the tax on someone earning $31200 = $879
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The tax on someone earning 7/26 of $31200 = $206
The first amount is what would be taken via withholding if you blindly use "1" allowance on your Form W-4 during the summer job. You might not want to overpay so much.
So how do you get the withholding algorithm to take out only $30 per paycheck instead of $126 per paycheck?
Look inside IRS Publication 15. It has tables that show what amount will be withheld based on your filing status (single), your paycheck gross ($1200), and your paycheck frequency (biweekly).
Here is the row for people earning 1200-1220 biweekly, from page 52 of Publication 15.
Allowances: 0 1 2 3 4 5 6 7 8 Withheld: 150 127 104 80 57 34 19 3 0
As expected, the amount withheld if you use "1" allowance is $127. From this table, it's apparent that you should use "5" allowances to have about $34 taken from each paycheck. This is a little bit more than the $29 or $30 you ideally would want withheld, but the result will be a small refund.
You'd pay $34 * 7 paychecks = $238
You'd owe $206 federal income tax.
You'd get a refund of $238 – $206 = $32.
This way, you'll see about $93 more in take-home pay in each biweekly paycheck!
Technically, if you owe under $1000 in federal income tax, you could just pay your entire tax at April tax deadline and not have any withholding and not be exposed to any underpayment penalty. So if you wanted to, you could choose "8" allowances to force no withholding, and then just pay your entire $206 tax at tax time. You could legitimately do that rather than incorrectly using line 7 "exempt" option in this situation.
What if you don't want to download and refer to IRS Publication 15?
There's an online tool from the IRS that can give you a suggestion of what allowances number to use: www.irs.gov/w4app.
If you enter you are Single and Yes you can be claimed as a dependent, then on the second screen say you have 1 job, and on third screen enter $8400 as income, choose Jun 1 as start date and Sep 15 as end date (for example) and that you are paid "Every 2 weeks," then if you proceed to the final result screen, it tells you your tax is $206 and you should use 5 allowances.
So consider using that online tool with your best approximation of your gross income and the closest approximation of your job start and end dates. (If you also have work during other months of the year, there are ways to tell the calculator how much you earned and how much withholding you've had.)
Using a larger allowances number than "1" allowance is perfectly legitimate if it results in your withholding being more precisely attuned to your actual tax liability. It does not mean you are claiming that you have dependent children. It is just finding the way to have the right amount withheld.
Have a great summer ... with more take-home pay!
Submitted June 04, 2017 at 08:49AM by wijwijwij http://ift.tt/2rpE8TN
