Many employees work only part-time, or they may work two or more part-time jobs. However, in many cases no federal income tax may be withheld, or not enough is withheld. At the end of the year when the employee files his federal Form 1040, he owes the Internal Revenue Service taxes, and if the amount is more than $200, then he may owe penalties as well. Why does this happen?
How Tax Withholding Is Calculated
To understand why this situation occurs, it is first necessary to understand how the amount of tax withholdings is normally calculated. Tax withholding tables are based on projecting an employee’s annual income based on his current wages, calculating the annual tax liability, and allocating a portion of that annual liability to the current payroll period. (See the article The Secret of How Payroll Tax Withholdings Are Calculated for a detailed explanation of the process.)
For instance, in the above-mentioned article a single employee who earns $36,400 in a year would have a federal income tax liability of $3,638.75. If his annual tax liability were divided by 26 payrolls for the year, then his employer would have to withhold at least $139.95 from each paycheck.
If he works full-time and is paid biweekly, his gross wages every two weeks would be $1,400. Using the tax tables in IRS Publication 15, Employer’s Tax Guide, his employer would withhold $147 for federal taxes each paycheck. So at the end of the year the employee would receive a tax refund when he files his Form 1040.
Why Sufficient Taxes Are Not Withheld for Part-Time Employees
On the other hand, suppose the employee still earns $36,400 per year, but instead of working full-time, he has two part-time jobs. He works 3 days a week at one job (6 days every two weeks) and earns $950 every two weeks, and he earns $450 every two weeks working 2 days a week (4 days every two weeks) at the second job. If his employers use the Biweekly withholding tax tables for a single person with 1 allowance, then his tax withholdings would be as follows:
Job 1 (3 days/week) = $78.00
Job 2 (2 days/week) = $8.00
Total withholding = $86.00
Total annual withholding = $2,236.00
Since his tax liability for the year will be $3,638.75, he will owe an additional $1,402.75 when he files his Form 1040. In addition, he will have to pay an underwithholding penalty.
How to Avoid Underwithholding of Income Taxes
So how can the employee avoid this situation? The key to a solution can actually be found on page 15 of Publication 15 under the heading of Payroll Period. It states that if an employee works less than a full week and informs the employer that he has more than one job, the employer should withhold taxes based on the Daily withholding tax tables. However, most employers simply treat all employees the same because they are using automated systems, and they withhold taxes from all employees based on the same payroll period.
However, an individual can use the Daily tax tables in Publication 15 to calculate how much should actually be withheld from his paycheck. Using the above example, calculate the withholding taxes on the employee’s first job as follows:
Divide the total wages by the number of days worked in the payroll period. ($950 / 6 days = $158.33/day)
Find the amount of withholding in the Daily withholding tax table = $18.00/day.
Multiply the daily withholding amount by the number of days worked. ($18.00 x 6 days = $108.00)
Using the same procedure the employee would determine that the withholding on his second job should be $40 each payroll period. So a total of $148 should be withheld from his wages every two weeks for the two jobs. If that total were withheld from his two jobs each payroll period, he would not be underwithheld at the end of the year.
So what can the employee do? The employee should complete a new Form W-4 for each job. On Line 6 of Form W-4 an employee can indicate any additional amount that should be withheld from each paycheck. The employee can calculate the difference between what should have been withheld using the Daily withholding tax tables and what is withheld using the withholding tax tables for the employer’s payroll period. In the above example the employee could have an additional $30 withheld for the first job and an additional $32 withheld for the second job.
Part-Time Employees Can Avoid Underwithholding of Income Taxes
Any individual who works more than one job and works part-time can avoid underwithholding of taxes by obtaining a copy of IRS Publication 15 and using it to calculate what his tax liability should be. Proper withholding of taxes means a tax refund at the end of the year, and money is saved because underwithholding penalties are avoided.
My name is Enrique Peters. I’m business consultant at DoMyHomeworkFor.Me specialising in the leadership development and time management, and guest post writer. I also provide training and coaching in the strategic and operational aspects of startup projects and business development.