Happy Tax Day! Today, April 15, is the federal filing deadline. Procrastinators were probably a little stressed this week, while others took care of their taxes months ago and will just be happy that the creepy costumed characters will no longer be waving at you while you drive around town.
Celebrating your tax refund? Not so fast.
Like many Americans, you may be excited if you are getting a refund back this year. If so, I want you to understand that you have everything backward. Yes, a refund means that you are getting money back from the government. But still - it is your money that is being returned to you, not an extra stipend from the government. Too much of it was withheld for income taxes when you worked. In other words, you gave Uncle Sam an interest free loan for the past year. Conversely, if you owe the IRS money, but not any penalties, then you benefited from an interest free loan from Uncle Sam.
Students: Watch out if you're working this summer!
Students with summer jobs are especially prone to having too much money withheld from their paychecks - i.e. giving Uncle Sam an interest free loan. This should particularly be avoided if you need that money to live on and will have to take out greater loans without it.
How withholding works\nOne of the most common reasons for too much withholding is that your employer will generally withhold for taxes as if you were a full-time, year-round employee, unless you tell them otherwise. What this means is that if you land a hot summer internship paying $1,000 per week, then you will have taxes withheld from your paycheck as if you were earning $52,000 per year. In reality, you may only be working for 12 weeks during the summer and earning only $12,000 during the year. As a result, when you do your taxes next year, you will find that too much was withheld and you are owed a large refund. The same holds true if your summer job pays $10 per hour. By default, your employer will withhold as if you were working 40 hours per week, 52 weeks per year, and thus earning more than $20,000 a year. In reality, as a student, you are probably not working 52 weeks per year. Work for just the summer, and you will earn about $5,000. As you would expect, if you only earn $5,000, your taxes will be much less than if you earn $20,000. So too great of a fraction of your wages will be withheld, and you may have to wait until you file taxes next year to get your money back. This problem can be even worse for business and law students who were fortunate enough to land lucrative summer positions.
Keep the money you earn \nThe good news is you can do something about this! You can adjust your withholding to keep the money you earn. The IRS even encourages this and offers forms, web calculator, and guidebooks to help you do so.
Your employer determines how much taxes to withhold from your paycheck based on a form that you fill out: Form W-4. Typically you will fill out Form W-4 before or on your first day of work. This may be part of a meeting with the human resources department or part of your orientation. It also could be included in a packet of paperwork to complete before you arrive for your first day on the job.
Understand Form W-4 \nForm W-4 may have a complicated name (Employee's Withholding Allowance Certificate), but do not be daunted. It is actually a fairly simple form, about half a page in size and with only seven lines for you to complete, including your name. The key is box #5, the number of allowances you are claiming. The higher the number of allowances you have, the less that will be withheld from your paycheck for taxes. Think of it like when you were a kid and got an allowance. More allowance means more money for you. For more information, you can reference IRS Publication 919, which provides instructions and information on adjusting your withholding. Like all IRS publications, this is conveniently available online from the IRS Web site. Just type "Publication 919" in the search box or navigate through the site.
Determine your allowances \nIt is important to know that you cannot just make up a number of allowances. If you withhold too little, you can get in trouble with the IRS and owe penalties. I have always believed in erring on the side of caution, when in doubt. But the good news is that there are a number of withholding allowance calculators available online that you can use for free. The IRS has a withholding calculator available on its Web site. Many large tax companies also have them available online.
Additional resources \nIf you find yourself still confused or needing help, you should ask the human resources department where you are working. They are much more experienced with these forms and navigating the systems. Also, here on Grounds, the Financial Aid Office at Student Financial Services is a great resource for students. They are online, and can be reached in person, by phone, or by e-mail.
Ben's column runs biweekly Thursdays. He can be reached at b.grosz@cavalierdaily.com.
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