Q: I just got my first summer job, which I will be able to keep as an after-school job this fall. Im trying to save as much money as possible for a car; right now I have to drive my moms old car, which is like driving a sofa-bed down the road.
Im confused about taxes. I was under the impression that I wouldnt have to pay taxes since Im not earning very much, but according to my paycheck federal, state and FICA tax is being withheld. I completed a W-4 form, and on the advice of my co-worker, I claimed zero allowances. My check to cash isnt much more than the taxes that were withheld. He says not to worry because Ill get the money back when I file my tax return. I want the money now, not next year!
Id planned to combine my earnings with some investments I have to buy a car this fall. Another co-worker told me to complete a new W-4 and claim several allowances. If FICA is for Social Security, I dont want to pay this at all, because I doubt there will be any money left by the time I retire. Can you help me with these issues?
Almost everyone is required to pay income taxes on earned income. Employers deduct income taxes from their employees checks and send the money directly to the government.
Your employer will provide you with a W-2 in January of next year showing the total amount you earned and the total amount of taxes that were withheld from your wages for the year. If you work for more than one employer during the year, each employer will provide you with a W-2 form.
As one of your co-workers indicated, once you file a tax return, if you paid more taxes than you owe, you will receive a refund of the overpayment.
You wont receive a refund for FICA taxes paid. This is your contribution to the Social Security system. All employees are required to contribute a certain amount of their wages earned for Social Security. As an employee, you are also required to contribute a percentage of your wages for Medicare. These payments are the FICA tax. Your employer is also required to pay a FICA tax on your behalf. Paying this tax earns credits that will determine your eligibility for Social Security.
You are not alone in wondering whether there will be any money left for you in your golden years, but you still have to pay the tax.
You can claim an exemption from the federal withholding tax if you meet the following conditions:
1) You expect a refund of all federal tax withholdings.
2) You were either not required to file a tax return last year or if you filed last year you received a refund of all the federal withholdings on your W-2s.
If you meet these conditions, ask your employer for another W-4, complete it and write exempt on line 7.
There is a W-4 withholding calculator at www.irs.gov. Claiming zero allowances will result in the maximum amount of tax withheld and would be the safest option, but claiming one will provide you with more cash now and will probably be fine.
Claiming more than one allowance may cause underwithholding, and unless you have a lot of savings, you could be in trouble finding the money to pay taxes owed when you file your tax return.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 99466, Raleigh, NC 27624