Hello - had a quick question about a young adult entering the workforce and federal withholding options
The young adult may work one job early in the year and another job later in the year (or multiple part time jobs concurrently) and will exceed the standard deduction in ~Q3 of the year
For federal withholding, is it ok to start this later in the year when we get closer to the threshold, or are we required to start 1/1 ? thanks again for the help !
There are two considerations.
1. The young adult has to have enough tax withheld over the course of the year to cover at least 90% of the total tax he will have to pay for the year. To do that all later in the year he would have to have very high withholding towards the end of the year, which might leave him with too little take-home pay.
Some people will tell you that you will not incur an underpayment penalty if you have a large amount of tax withheld late in the year. That's true because, for calculating the penalty, withholding is treated as if it was withheld evenly throughout the year, regardless of when it was actually withheld. But doing that is not practical for a young worker with little or no financial resources because it makes take-home pay very low towards the end of the year.
2. The person cannot claim exemption from withholding if he will have to pay some tax for the year, so he probably cannot legally have no tax withheld early in the year.
The young adult should use the Tax Withholding Estimator on the IRS web site to figure out what to put on the W-4 form that he gives to each employer.
My bottom line answer is no, he cannot wait until the third quarter to start having tax withheld. He should have normal withholding from each job during the year, and not try to manipulate it or game the system.
Best to make quarterly payments if self employed. If an employee your withholding should take care of that.
There are two considerations.
1. The young adult has to have enough tax withheld over the course of the year to cover at least 90% of the total tax he will have to pay for the year. To do that all later in the year he would have to have very high withholding towards the end of the year, which might leave him with too little take-home pay.
Some people will tell you that you will not incur an underpayment penalty if you have a large amount of tax withheld late in the year. That's true because, for calculating the penalty, withholding is treated as if it was withheld evenly throughout the year, regardless of when it was actually withheld. But doing that is not practical for a young worker with little or no financial resources because it makes take-home pay very low towards the end of the year.
2. The person cannot claim exemption from withholding if he will have to pay some tax for the year, so he probably cannot legally have no tax withheld early in the year.
The young adult should use the Tax Withholding Estimator on the IRS web site to figure out what to put on the W-4 form that he gives to each employer.
My bottom line answer is no, he cannot wait until the third quarter to start having tax withheld. He should have normal withholding from each job during the year, and not try to manipulate it or game the system.
Thanks so much for the feedback.
So to add some clarity to my question, let's assume the individuals AGI for the year is projected to be 15,250 and the standard deduction is 15,000. From a practical view, would one still start withholding on the $250 of taxable income on 1/1/xx or later in the year. In this case, the tax is so small (~$30-$40), I guess i'm asking can we simply start the withholding middle or later in the year
If the federal tax for the year is less than $1,000 there is no need to have any withholding at all. The person can simply pay the total tax when he files his tax return. There will be no penalty if the amount owed is less than $1,000. With such low pay, employers will probably not withhold any federal tax. So just answer the questions on Form W-4 accurately and don't worry about it. For such small amounts it's not worth putting any effort into trying to manipulate the withholding.
Also keep in mind what I said earlier: you cannot legally claim exemption from withholding on the W-4 if you will have to pay any tax at all for the year, even if the tax is only a few dollars.