Here's a concise breakdown of your strategy and the potential penalties:
Yes, your strategy of withholding an additional amount from your main job and zero from your side job can be a reasonable approach, especially if your main job's income is significantly higher and more stable.
Here is why this often works:
- Centralized Withholding: It's often easier to manage additional withholding through one employer, particularly your primary one, as they handle a larger portion of your income.
- Side Job Income Fluctuation: Side job income can be less predictable. If you're unsure of its exact total, it's safer to over-withhold slightly from your main job to cover potential tax liability from the side job, rather than under-withholding from both.
- W-4 Step 2: The W-4 form addresses multiple jobs. One common method (similar to what you're doing) is to make all necessary adjustments on the W-4 for the highest-paying job, leaving the other W-4s simpler.
However, the key is the amount of the additional withholding. An extra $78 per paycheck might be perfect, or it could be too much, or too little. The IRS Tax Withholding Estimator is still the gold standard for calculating the precise amount. It will ask for income from both jobs to give you the most accurate recommendation for how to fill out your W-4s.
Penalties for Under withholding
The IRS wants you to pay your taxes throughout the year. If you don't withhold or pay enough, you can face an underpayment penalty.
Here is what you need to know:
- When it Applies: You'll generally owe an underpayment penalty if you owe $1,000 or more in tax when you file your return.
- Safe Harbor Rules: You can typically avoid the penalty if your withholding and estimated payments meet one of these "safe harbor" rules:
- You pay at least 90% of the tax shown on your current year's tax return.
- You pay at least 100% of the tax shown on your prior year's tax return (this increases to 110% if your Adjusted Gross Income (AGI) in the prior year was over $150,000).
- How it is Calculated: The penalty is essentially an interest charge on the underpaid amount for the period it was underpaid. The interest rate is set quarterly by the IRS. It's not a flat fee but accrues over time.
- Severity: While it's an added cost you want to avoid, it's typically not "severe" in the sense of being a crippling amount for most taxpayers who simply underwithhold. It's more of a nuisance and a percentage of the underpaid tax. However, it can add up, especially on larger underpayments. The current interest rate for underpayments (as of April-June 2025) is 7%.
- Waivers: The IRS may waive the penalty in certain limited circumstances, such as a casualty event, disaster, or if you retired (after age 62) or became disabled during the tax year and the underpayment was due to reasonable cause.
To avoid penalties and keep as much of your paycheck as possible without owing a huge sum later, your best bet is to use the IRS Tax Withholding Estimator after your side job starts and you have a clearer picture of both incomes. This will help you determine the most accurate additional withholding needed to meet one of the safe harbor rules.
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Terri Lynn
