Did you know that it’s very common for an individual with more than one job to actually owe when they file their income tax return? That’s right, they owe! It’s not a hard and fast rule but often times when taxpayers in this situation owe money it comes as a surprise because they believed they had completed the forms correctly when they started their jobs.
Therein lies the problem, the forms…
Let’s use a hypothetical example. Assume Jimbo worked three jobs in 2016 and earned $25k at each job for a total of $75k. Jimbo is single with no “above-the-line” deductions, itemized deductions, or dependents. He also elects no tax-deferred options offered by his employers and does not contribute to an IRA. He shows up to work, gets paid, and goes home. Nothing fancy.
When he was hired at each job he was asked to complete Form W-4 and in doing so he assumed one dependent (himself) and completed the form as such. It made sense to him in his head and for the most part it seems reasonable. That is, except for one minor detail; he didn’t earn $25k, he earned $75k. You see, his payroll was calculated separately at each job based on Jimbo earning $25k. Without any other variables in this example, I can tell you that Jimbo will owe.
What Could He Have Done?
As I mentioned above, Jimbo’s taxes are being withheld separately by each employer assuming he only works that one job earning $25k. Jimbo actually earns $75k per year and therefore he should have adjusted his payroll withholding from each employer once he took on the additional jobs. Sure, he would have received less in each of his paychecks but he also would be less likely to owe come tax time.
How to Make Changes
The instructions to Form W-4 include a calculation that individuals can use to determine their withholding. Unfortunately most taxpayers ignore it which is one reason why tax returns are even a thing. At any point during the year an individual can obtain a new Form W-4 from their employer and make changes to their withholding. Most employers will probably never ask employees to fill one out (aside from when they first hire someone) or help complete the form. This might be where it pays to ask a trusted tax advisor to look over the forms before submitting to an employer, especially when there is a life event or additional employment. My clients frequently reach out to me throughout the year and ask me what they should do when they have life events such as having children, buying a house, or starting a retirement fund.
Does It Really Matter?
Kind of. In most cases, if a taxpayer owes more than $1k to the federal government at the end of the year then there is a penalty that is assessed for underpayment of taxes. Although the penalty is usually insignificant, owing taxes can come as a surprise in itself. Having to pay hundreds or thousands of dollars all at once without being prepared can prove burdensome to most people.
Who Else Might This Impact?
This situation is also commonly found when individuals change jobs during the year or for those who have side jobs which they report on their taxes. When there are significant changes in income taxes that are not considered then there is an increased likelihood that taxpayers might owe when preparing their annual return. This is another great reason why it’s a good idea to work with a trusted tax professional to help you receive every deduction possible each year.
Do you need help with your withholding? Or maybe you have a cautionary tale you would like to share about working multiple jobs. I would love to hear from anyone willing to share. Postin the comments section below!