As a young professional, you might be filing taxes for a full-time job for the first time. Dealing with taxes can be scary, but here are a few tips to help you survive tax season:
- Understand the different types of taxes you might have to pay.
Most young professionals will pay the following taxes:
- Federal taxes: Income tax rates vary from 0% to 37% of your taxable income, and the rate you pay depends on how much you earn. The more money you make the higher the percentage will be. Your employer will automatically take money out of your paycheck every payday to cover federal income taxes.
- State taxes: This is typically 3% to 11% of your gross pay for most states. A few states have no income tax at all, like New Hampshire, Florida, Wyoming, Texas, Tennessee, Washington, South Dakota, Nevada, and Arkansas. On the flip side, there are states with high state income tax rates, like California and New York. These two states are known for their high tax rates. State taxes likely be taken out of your paycheck every payday.
- Local taxes: This only applies to certain large cities like New York City, and the tax rate can be up to 10% of your gross pay. Employers will also automatically collect any local taxes you owe.
- Social Security: Your employer will withhold 6.2% of your pay for this purpose. This tax is withheld on the first $147,000 of income in 2022 and $160,200 in 2023. This tax rate usually increases each year slightly.
- Medicare: 1.45% of your pay will be withheld for this purpose.
- Understand what getting a tax refund means.
You’ve likely heard people excitedly talk about receiving a refund when they file their tax return. While many people love receiving a tax refund, 44% of Americans have no idea where it comes from*. A tax refund means that you have overpaid your taxes to the government (federal and/or state) throughout the year, and they are giving you your money back. You’ve essentially given the government an interest-free loan. Who wants to pay more taxes than you owe? You can adjust your tax withholding through your payroll in the future if you want less money coming out of your check.
- Understand the different tax forms you might receive.
After the end of the year, you might receive several tax forms. You need some of these forms to file your tax return accurately:
- W-2: This form, issued by your employer, summarizes your wages and any taxes and deductions withheld throughout the year. You should receive this by the end of January each year. Everyone needs this form to file federal and/or state income taxes.
- 1099: This form and its variants, are used to report many other types of income that you might receive, including bank interest (1099-INT). Not every taxpayer will receive these forms.
- 1098: This form and its variants are used to show payments you have made that may qualify you for a federal income tax benefit. Popular ones can include your 1098-T, which shows how much you paid for school tuition and expenses; a 1098-E, which shows how much student loan interest you paid; or 1098, which shows mortgage interest payments. All 1098 tax forms are available on IRS.gov.
- Understand due dates.
Your tax return, also called the form 1040, is usually due on April 15 each year. That date will vary if April 15 falls on a weekend. However, you can request a 6-month extension by filling out form 4868 with the IRS. This isn’t an extension to pay your taxes; it’s only an extension to file your tax return. Any taxes you might owe are still due by April 15. Paying your taxes late might incur penalties.
- Understand what to do if you owe money after filing your return and don’t have the money to pay.
First, don’t panic, but also don’t ignore the problem. Owing the government isn’t something you can wish away. The IRS never forgets. Racking up late fees will make the situation much worse.
The first step is to contact the IRS to set up a payment plan. Pay what you can as soon as possible, but ensure you’re in contact with the IRS. That is the best way to keep things from going from bad to worse.
To prevent yourself from owing taxes in the future, you’ll want to consider updating or increasing your tax withholdings by filling out a new Form W-4. There are also state withholding forms you can update if you find yourself owing money to your state. If you’re unsure how to do this, contact your HR/payroll department.
Need more help figuring out all this income tax stuff? Make sure to reach out to a qualified CFP® professional who best suits your needs. Get started today using the “Find a CFP® professional” tool.