June 21, 2011 - Since we are nearly at the halfway point of the year, now is a good time to check on your withholding.
What is “withholding”?
With each paycheck you receive, you have portions of your wages “withheld” to pay Federal and State Income Tax, Social Security and Medicare. Only the Social Security and Medicare amounts are based on the actual taxes that you owe since these are flat rates. The Federal and State income tax withholdings are estimates of taxes owed based on the amount of earnings in your check for that payroll cycle. Each check is treated as if the earnings for that period reflect the amount you are earning all year. This is why when you work overtime; the percentage of taxes seems much higher since the withholding estimates assume that you work like that all year.
More than one job
Withholding amounts do not take other jobs into consideration. Applying the same principal mentioned earlier, if you have a side job that you work say two days a payroll cycle, the withholding amounts will assume that two days a paycheck is all you work all year. Since your total income consists of your main job plus your side jobs, the percentage of your earnings withheld on the side job often do not keep up with the withholding from the main job, creating a deficit in total withholding. Since you are taxed on total income, the withholding on the side job needs to keep pace with the tax bracket of your total income, not just the assumed lower amount of annual earnings from the side job.
The “W4”
This is where the W4 or Withholding Certificate comes into play. It is a form designed to peg the rate of withholding that you wish to have with your paycheck. It is divided between filing states (married or single), the number of exemptions and any additional amounts you want withheld. This may need to be raised and lowered to accommodate all the income you earn. One common mistake taxpayers make with this form is thinking that by claiming single or married, they are disclosing their marital status versus artificially changing the rate of withholding to one similar to a single or married individual. Married travelers will often request that the withholding be pegged at a rate equivalent to what a single individuals rate would be if they need more withholding than normal.
Checkup
Now is the time for you or your tax advisor to look at your year to date income and compare it to your year to date withholding to be certain you are having enough withheld while you still have time to catch up. Otherwise you could have a large amount due or an excessive refund at tax time.
About the author:
Joseph Smith is an IRS Enrolled Agent and former travel respiratory therapist whose firm (TravelTax LLC) provides tax preparation and audit representation for the mobile professional. He is a regular contributor to HealthcareTraveler, Locum Life and a speaker at the annual Travel Medical Professionals Convention. For more travel nursing tax advice, visit TravelTax.com.
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