Wolters Kluwer Tax & Accounting looks at tax issues facing young adults starting out in the working world.
What: For many entering the workforce for the first time, that first paycheck can be a bit of a shock – why is there such a significant difference between gross and take-home pay? What are all these deductions? Welcome to the world of taxes. Taxes can be influenced dramatically by the type of job you have and some of your choices.
Why: Understanding some of the basics of tax law can help you understand your options and help you make informed decisions about your financial future. Some of the potential tax issues you are likely to face include:
- Employee vs. Independent Contractor. How you are taxed varies greatly depending upon whether you are considered an employee of a company or whether you have your own business doing work for other companies or individuals. Some employees who have gigs on the side may be both an employee and an independent contractor
- Form W-4. Employees are likely to be required to complete a Form W-4 which will help determine the amount of income tax withholding from your pay each pay period, and should receive a Form W-2 at tax time, documenting the pay and amount withheld for the year. A company may ask Independent contractors to complete a Form W-9 which will give them your tax identification number to provide a Form 1099 to you and the IRS at tax time, documenting the amounts you received from that company for the year. Independent contractors may also be required to pay estimated taxes, since your income is not subject to withholding, and self-employment taxes for Social Security and Medicare
- State taxes. There are not only federal taxes to worry about but also possible state income taxes, potentially involving multiple states if your work involves travel to different states
- Benefits. As an employee, you may be eligible for benefits related to tax-favored retirement plans, employer health plans and other employee benefits. As an independent contractor, you will be responsible for identifying your benefit programs
- Business expenses. As an employee, out-of-pocket business-related expenses not reimbursed by your employer are generally no longer tax deductible. As an independent contractor, your ordinary and necessary business expenses are generally deductible on Schedule C of Form 1040 or on a tax return for your separate business entity
- Dependent status. Moving into the working world may make you no longer qualified to be a dependent on your parents’ tax return
- Student loans. Tax issues with the deduction of interest on student loans are another issue that may require a discussion with parents
- IRAs. With earned income, individuals now may qualify for tax-advantaged contributions to Individual Retirement Accounts or Roth IRAs
- Tax deductions and credits. There are some other possible tax deductions and credits to which you may be entitled depending upon your particular circumstances
- Keeping records. It will be important to get in the habit of keeping good records to support any items claimed on the tax return
Who: Have questions about the 2022 tax developments? Reach out to Tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst, for Wolters Kluwer Tax & Accounting.
PLEASE NOTE: These materials are designed to provide accurate and authoritative information in regard to the subject matter covered. The information is provided with the understanding that Wolters Kluwer Tax & Accounting is not engaged in rendering tax advice or accounting, legal, tax or other professional service.