Newly Employed? Here Are 20 Helpful Tax Tips
Tax season is underway, and those who recently started a new job likely have many questions. Whether you’re a recent graduate or a long-time professional who landed a new job, started a second job — or side gig — or returned to the workforce after taking some time away, you want to get your taxes right.
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Since Tax Day is just around the corner — it’s April 18 this year — you need tax advice now. Use these 20 tax tips to cover all the bases with your new job.
First Job
1. Double check to ensure your W-4 is completed correctly.
“Make sure you correctly fill out form W-4 by looking at your entire tax picture and not just the income source for the new job you have,” said Karla Dennis, an enrolled agent and founder of Karla Dennis & Associates. “Doing this will help to ensure you are not under withheld in taxes.”
2. Determine your filing status.
“Your filing status will determine your tax bracket and the amount of your standard deduction,” said Sean K. August, CEO of The August Wealth Management Group. “You may be able to claim your own exemption if you’re not claimed as a dependent on someone else’s tax return.”
3. Understand your tax credits.
“As a first-time worker, you may be eligible for tax credits such as the Earned Income Tax Credit or the American Opportunity Tax Credit,” he said.
4. Start saving for retirement.
“Even if you’re just starting out in your career, it’s never too early to start saving for retirement,” he said. “Consider contributing to a 401(k) or an IRA.”
5. Consider a high-deductible health insurance policy eligible for a Health Savings Account.
“An HSA provides tax advantages when contributing and paying for qualified medical expenses,” said Cecil Staton, CFP CSLP, president and wealth advisor at Arch Financial Planning, LLC. “Contributions may be tax-deductible and have tax-free withdrawals used for such expenses.”
He said funds you don’t need for immediate healthcare costs can be invested for long-term growth.
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New Job
6. Check your W-4.
“Make sure to fill out your W-4 form accurately to ensure you’re withholding the right amount of taxes from your paycheck,” August said. “You can use the IRS withholding calculator to help you determine the right amount to withhold.”
7. Understand your benefits.
“Make sure you understand the benefits that come with your new job, such as retirement plans, health insurance and flexible spending accounts,” he said. “These benefits may have tax implications.”
8. Save your receipts.
“If you’re moving for your new job, you may be able to deduct some of your moving expenses on your tax return,” he said.
Second Job or Side Gig
9. Understand the tax implications.
“If you have multiple sources of income, it’s important to understand how this will impact your tax liability,” August said. “You may need to adjust your withholding or make estimated tax payments.”
10. Keep track of your expenses
“If you’re working as an independent contractor, you may be able to deduct certain expenses on your tax return,” he said.
11. Consider forming a business entity.
“Depending on the nature of your side gig, it may make sense to form a business entity such as an LLC,” he said. “This can help protect your personal assets and provide additional tax benefits.”
12. Understand your employment type or income source.
It’s important to know if you’re a W-2 employee or an independent contractor, Dennis said.
“Understanding which type of income you are receiving will determine the amount of tax you will ultimately need to pay, as well as the deductions you will ultimately be able to take,” she said.
13. Maintain a paper trail.
“With tax laws changing often and there being some differences between federal and state tax deductions, it is best to keep all your receipts and not assume certain deductions are not deductible,” she said.
14. Understand your tax obligations.
If you are a W-2 employee and you have a side gig, Dennis said your tax withholding from your employer might not be enough to cover the profits from your side gig.
“Not to mention, you will not only have income tax — you may have self-employment tax when working a side gig,” she said. “Knowing what taxes to pay and when will prevent you from having underpayment penalties and a shocking tax bill.”
Return to the Workforce
15. Review your tax situation.
“If you’ve been out of the workforce for a while, it’s important to review your tax situation to ensure you’re up to date on any changes in the tax code,” August said.
16. Understand your benefits.
“Make sure you understand the benefits that come with your new job, such as retirement plans, health insurance and flexible spending accounts,” he said. “These benefits may have tax implications.”
17. Consider tax-advantaged accounts.
“If you’re starting to save for retirement again, consider contributing to a tax-advantaged account such as a 401(k) or an IRA,” he said. “This can help reduce your taxable income and provide additional tax benefits.”
For Everyone
18. Be aware of changes associated with the updated W-4.
“With the Revision of the W-4, employees no longer have a section with the number of ‘exceptions’ to choose for how federal income tax is being withheld from your pay,” said Deitra Redd, senior tax analyst and registered tax preparer at H&R Block. “Most Americans look forward to receiving a refund, however the revision of the W-4 actually takes the correct liability amount out of each pay once you choose a filing status.”
Want a refund? If so, she suggested adding an amount to line 4c — additional withholding.
“If you list the amount of dependents on the W-4, you essentially will be receiving credit with less federal tax being withheld,” she said.
19. Review taxes being withheld from your paycheck.
Even if you get direct deposit, she recommended reviewing the tax section of your paycheck — line ‘Fed W/H’ — to make sure the taxes being withheld are accurate.
“It should be 8-9% of your gross amount,” she said. “If it is not, your potential tax situation at the end of the year may result in a smaller refund or an amount due.”
20. Visit the ‘Tax Withholding Estimator’ on the IRS website.
If you aren’t sure of your specific tax situation, she recommended using this IRS tool to get an estimate.
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