When you get your first job, it may be surprising – and disappointing – just how much you have to pay, before you get what’s left over.
For starters, Uncle Sam dips into your pay for income tax, Social Security tax and Medicare tax. And depending on where you live, you can also count on state and maybe even local taxes. What started out at a reasonable figure (we hope) has been somewhat … diminished, hasn’t it?
Here’s how this withholding business works.
A Matter of Withholding
When you start your new job, you’ll be asked to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Your boss will use this to figure how much in federal taxes to withhold. Not sure how to fill it out? Use the IRS’ Withholding Calculator to get a better idea. There’s also a worksheet on the form that can help you work out what’s best in your situation.
If you live in a state that has income tax — most do — you’ll also have to fill out a similar form for withholding state income taxes.
Side note for the self-employed: You’ll have to hold out taxes for yourself from the payments you get from clients, and send them in regularly – or be prepared to pay up when you file your income taxes at the end of the year. We don’t recommend that last way – it’s likely to get you slapped with a penalty for not paying your tax all along. Pay-as-you-go is definitely the way to go.
Having your first full-time job probably also means you’ll need to make some decisions on benefits for the first time. Depending on the size of the company that employs you, there could be choices on retirement, health insurance and other items that you may not have faced before. So here are a few guidelines.
Retirement – Since this is your first full-time job, saving for retirement is probably not on your radar right now, but it should be. The earlier you start saving for retirement, the more you'll have when it's time to use that money. If your employer offers a 401k plan, enroll as soon as you’re eligible. Even if you don’t think you can afford the entire allowable withholding amount, contribute enough to qualify for the employer match.
Health Insurance – If your employer offers a health insurance plan, take part in it. Many times, the company will pay some – or even all – of the premium amounts. But even if you have to pay the entire premium, it’s still worth the expense.
Some employers also offer flexible spending accounts as part of their health package. These allow you to put money aside for medical expenses, such as deductibles. Most accounts do not roll over funds from one year to the next, so you have to use it or lose it by the end of the year.
Other Benefits – These can include term life insurance, disability insurance, even pet insurance. There’s lots of variety in this area, and lots of other ways withholding can show up on your paycheck.
You may not earn enough from your summer job to owe income tax. If that’s pretty clear when you’re filling out Form W-4, you may be exempt from federal income tax withholding – but you still have to fill out the form. But if you’re working for someone else, your employer will usually still have to withhold Social Security and Medicare taxes from your pay. (If you’re self-employed, you have to pay those taxes yourself.)
And even if you didn’t earn enough money to file a return, you may want to anyway. If your employer withheld income tax from your pay, you’ll have to file a return to get those taxes refunded.