Many people take a second job, or have their spouse take a job, with the idea that they will make extra money for their household only to find that come tax time they owe. Nobody likes owing taxes, but it is especially frustrating when the point of the additional work was additional income. This phenomenon doesn't make sense to many folks, but when you know all the pieces of the puzzle it is easier to understand and avoid.
In America, we prepay our taxes during the year, through withholding from a job or via estimated quarterly tax payments if self-employed - sometimes both. Employers collect Form W-4, Employee's Withholding Allowance Certificate, from new employees to determine how much taxes to withhold from each paycheck. Owing taxes usually comes down to the fact that the Form W-4 worksheet doesn't account for a number of situations that apply to many taxpayers. Not having enough taxes withheld can occur when you get married or divorced, have a baby or finally get that empty nest you dreamt about during the teenage years and you don't update your W-4. However, one of the most common under withholding situations is the second job scenario.
In this case, one issue could be that the Form W-4 worksheet was completed for the second job within the family, regardless of who is holding the job, using the same number of exemptions as the other W-4, essentially doubling the exemptions resulting in less tax withheld than required. To help you avoid the dreaded "owe" when you have two jobs, complete only one Form W-4 worksheet, and include all the information on the W-4 for your highest income job. Complete the second W-4 by checking the box for Married but withholding at the higher rate of Single and zero exemptions. This method helps keep your actual withholdings in line with your total income. The same holds true when there are two job holders in the household, figure out withholding on one worksheet using combined income, adjustments, deductions, exemptions, and credits and then claim the recommended withholding on the higher wage earner and use Single and zero exemptions on the lower income.
Let me clear up some confusion here - yes I told those of you who are married to use the status "Married but withholding at the higher rate of Single" on your W-4. The truth is, the marital status on your W-4 does not have anything to do with your tax return, it just determines how much taxes are withheld, and since it isn't always accurate, I'm giving you a way to make sure you don't owe. If you'd rather try to find that sweet spot, you paid in the correct amount and neither owe or get a refund, then check out the IRS Withholding Calculator.
The withholding calculator will ask you appropriate questions to help you consider all the life changes and scenarios that can change your tax due amount. There is even a place to enter your deductions. It is designed to make sure you are having the correct amount withheld based on your specific situation. You only need the most recent pay stubs from each job held by you or your spouse, the number of dependents you expect to claim on your tax return, and some other pertinent information to get a good estimate.
Summer is the perfect time to get a firm grasp on your taxes, you have time to make changes so you won't owe and the changes won't cost much each payday. If you enjoy getting a big refund, as I do, set your Form W-4 to zero and have the maximum taxes withheld. On the other hand, if you budget well and do not mind writing a check to the Treasury if needed, then lower withholding will put more money in each of your paychecks. Obviously, determining accurate withholding can be tricky, if you are frustrated with the worksheet or confused about the withholding game, talk to a Tax Pro.