Hi, I am at a loss as to how withholding works, and am concerned that too much is going to be withheld from my summer paychecks. I am a student, but will be working at a law firm for 12 weeks in the summer. The pay rate is $3100/week, which would put me into a high tax bracket. However, the money made in those 12 weeks is the only money I will make all year, for a total of $37,200, which would put me in a much lower tax bracket. I am concerned that money will be withheld as if I'll be making that much all year long, as if I am making $160,000. Is that the case? Is there any way to prevent that from happening?
Sam
You're right - if you have federal income tax withheld as if you are earning $3,100 per week all year, you will have way too much tax withheld. At least $4,000 too much over the course of the summer, in fact.
I usually recommend the IRS withholding calculator, however it doesn't work very well for partial year situations. A more accurate method is to use last year's tax forms and estimate how much federal income tax you will owe. I estimated you will owe about $3,885 for 2008 - less if you qualify for education expense deductions or credits. You should have the amount you expect to owe withheld evenly over 12 weeks ($3,885 divided by 12 equals $324).
Next, go to the federal payroll withholding calculator at http://www.yourmoneypage.com/withhold/fedwh1.cgi, and enter your information. Try entering different numbers of withholding allowances to find out how many you should claim to have about $324 in tax withheld every week. You may need to claim as many as 20 allowances. That may seem odd, but that's the only way you're going to avoid having the IRS hold your money until next year!
Congratulations on getting the summer position. Sounds great!
Sally