Now that I have a part-time job, how do I keep more of my salary? Is there any tax relief for students?
As soon as you start earning, you will need to learn about the IRS, or the Internal Revenue Service. People who work few hours a week at a deli as well as CEOs of major corporations cannot escape the taxman. It takes an expert to understand tax complexities thoroughly, and some of the regulations can be confusing. There are ways to lower your taxes, though, and as a student, this information is of paramount importance.
Even with a part-time job, your first paycheck is likely to be smaller than you were initially expecting. Just working a few hours a week can require deductions and withholding, as they are calculated as a percentage of your earnings. When you start work, you will need to complete a W-4 form which largely determines how much tax you will be paying.
There are three components to payroll taxes, and they vary depending on where you live. It will be a small miracle if you have a significant salary left after you have paid federal tax, state taxes, local taxes as well as social security and medicare. On your pay slip, you may see these all combined under the heading of FICA.
The IRS uses a formula to predict how much you will earn by the end of the year. From this your employer can calculate what you should be paying in taxes. Your actual earnings, previous earnings and information entered on the W-4 for are used in this formula. If you think you are paying too much tax, as most of us do, you can submit a new W-4 form.
If your boss does not file any taxes for you, it will be because they consider you a freelancer or self-employed. Nearly one third of American workers are now freelancing in some capacity. Popular choices for freelance student workers include catering, tutoring, online blogging and designing websites. As a freelancer, the taxes become your own responsibility, and the burdens could be higher. If you work as an employee, your boss should be paying half of your social security. As a self-employed worker, you will pay the whole amount. On the upside, there are more exemptions that can be claimed as a freelancer. Therefore, it is important to be aware of your precise employment status.
Reducing taxes can be achieved by a number of ways. Low-income workers and students are entitled to an earned income tax credit (EITC) if earnings are below the required limit. Your marital status and whether or not you have children can also affect your tax status.
Students are entitled to two tax credits for part-time work to compensate for tuition fees. The first is worth $2,500 and is called the American Opportunity Credit. It can be used for the first four years of college to offset the cost of study materials, tuition fees and living expenses. Another tax credit worth an additional $2,000 is the Lifetime Learning Credit and can also be used to offset college fees. If your parents are funding your education, they can claim for this.
Study-related work generating income from the university itself is the only way students can be exempt from FICA taxes. It needs to be ascertained whether work or study is the predominant factor. For lower taxes, the main purpose should be study.
The only difference between death and taxes is that death doesn’t get worse every time Congress meets… Will Rogers.
Martin J. Young is a former correspondent of Asia Times.