I am working part time to pay some of my tuition. What is the deal on taxes? Does the IRS offer any help to poor students?
Now that you are earning money, you learned about the IRS. You will spend the rest of your working life asking the same question: how do I keep more of my salary? The level of expertise you need to answer certain tax questions is similar to getting a doctor’s opinion. Just like medicine, however, taxes have a grey area. There are times when you can actively lower your tax bill. We will overview what you need to know, even when working part time.
Your first paycheck from that part-time job you just landed might be smaller than expected. Deductions and withholding are calculated on a percentage of your earnings, even if you only work a few hours a week. The actual amount calculated by your employer will reflect the information you entered on the W-4 form when you started the job.
Payroll taxes can be broken down into three components: federal taxes, state taxes and local taxes, depending on where you live. On top, there will be Social Security and Medicare taxes, it is a small miracle that there is any salary left. These may be lumped into one listed as FICA taxes on your pay slip.
Your employer should calculate your income tax withholding based on an IRS formula that predicts how much you are likely to owe in taxes by the end of the year. The formula uses your actual earnings, previous earnings and information entered on your W-4 form. You can calculate your own taxes and file a new W-4 if you think your boss is taking too much.
If your employer does not file any taxes for you it will be because they consider you as a freelancer or independent contractor. Taxes are your responsibility and you may end up paying more Social Security, as the employer pays half of it if you are classified an employee. However, as a freelancer you can claim more deductions. Take too many deductions, more than you are allowed, and you may face a severe tax penalty.
There are a couple of ways to reduce your taxes. The Earned Income Tax Credit (EITC) is designed to decrease taxes for lower-income workers or students. Your working income must be below the required limit and can be affected by your marital status and whether or not you have children.
As a student, two part-time tax credits can be applied to your part-time income to offset tuition fees. The American Opportunity Credit, worth $2,500, can be applied to offset cost of books, tuition and expenses for the first four years of college.
The Lifetime Learning Credit is also for tuition fees, books and college expenses and is worth $2,000. The difference is that parents can claim this if they are funding your education.
Students can be exempt from FICA taxes only if they are receiving income from the university for study-related work and activities. It depends on whether employment or study is the predominant factor.
One in four corporations doesn’t pay any taxes… Bernie Sanders.
Written by John Regan, former Director of Sales, for equity research.