Starting a new job in the middle of the year? Use the part year withholding method to avoid excess tax withheld

part year withholding works for cab drivers too

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When you file your W4 form with a new employer, this instructs the employer how much tax to withhold from your pay, based on a full year’s pay rate.  There is a strategy you can employ that will reduce the amount of tax withheld from your pay – known as the part year withholding method.  This method of tax withholding calculation takes into account that you are only working and earning for a part of the year, so your overall income will be less, and there would be less tax required.

If you start working in the middle of the year (or worse, late in the year) the normal rate of withholding would result in significant over-payment of tax withheld.  The standard tables used to calculate withholding make the assumption on each pay that you are earning at this rate over the entire period.

 

For example, if you earn $500 in a week, the assumption is made that you’ll earn roughly that amount over the entire year, or $26,000 ($500 x 52 weeks).  Based upon how you fill out your W4, a certain amount of tax will be withheld – assuming you’ve filled out the W4 as Single and zero dependents, from your $500, $27.60 would be withheld for federal income tax.  (Note, this doesn’t include Social Security and Medicare tax, this is only federal income tax withholding.)

However, if you are starting the job in the middle of the year and you didn’t have income for the first part of the year (or very little income by comparison), you can request that your employer utilize the part-year method.  This way, your total income assumed for the year is closer to reality when the withholding is calculated.

From our example above, if you started the job on July 1 (and you didn’t have a job before), your total earnings for the year at $500 per week works out to $13,000.  The “normal” withholding would result in a significant overpayment of tax for the year – your expected tax would only be about $286, instead of over $1,900 if your income was $26,000.  So if your employer uses the part-year method of calculating withholding, you’d only have half as much tax withheld from each pay ($13.80 per pay, or a total of $358.80).  Adjusting your claimed allowances could reduce this withholding even further, since the expectation is that your tax would be about $70 less than your withholding.

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Post originally appeared as Starting a new job in the middle of the year? Use the part year withholding method to avoid excess tax withheld on Getting Your Financial Ducks In A Row

The post Starting a new job in the middle of the year? Use the part year withholding method to avoid excess tax withheld appeared first on Getting Your Financial Ducks In A Row.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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