I bet you thought every employee is required to pay federal withholding tax as they earn the money. After all, withholding tax is a “pay as you earn” tax, right? Well, for students who have summer or part-time jobs, the IRS has decided it is not necessary to pay withholding if certain requirements are met. This enables students to keep more of their money as they earn it and releases them from the burden of filing a tax return in April to get everything back they have paid. In most cases, students are exempt from paying federal withholding under the following circumstances:
- They can be claimed as a dependent on someone’s (usually their parents) return;
- The total income for the year 2012 does not exceed $5,950;
Unearned income such as interest, dividends, proceeds from stock sales, etc. does not exceed $950, and - They were not liable for taxes in 2011. This means they either had no income or filed for a refund of all the withholding tax they paid.
Student workers are still required to pay the Social Security and Medicare taxes. However, if they meet all the rules listed above, they can elect not to have any withholding taxes deducted from their paychecks. If you have a student who falls under these guidelines, you may want to have him/her resubmit a W-4 to stop this deduction.
Students who work in jobs where tips are part of the income must keep careful track of these earnings and include them in determining if they meet the above criteria. If the tips total more than $20 in one month, they must be reported to the employer by the middle of the next month.
Those who can meet all the IRS requirements above and want a little more money each payday should consider eliminating the withholding deduction altogether.
As always, if you would like further information regarding this topic or any other tax related issue, please contact Henssler Financial’s Tax & Accounting Division at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
