After tax pay for summer associates Forum

[jpSartre]

104 428.8

[PKSebben]

This is correct. As I stated before, however, you run the risk that the IRS may review your exemptions, decide that you've claimed way too many, and cap your exemptions at some reasonable amount. This will result in their sending what's known as a "lock-in letter" to you and your employer, instructing your employer to withhold taxes at a different rate than what you've claimed on your W-4. They might be annoyed by having to deal with this shit for a summer associate (or maybe they won't care). Just pointing out a possible risk.

You're not going to get in trouble with the IRS, though. Personally I'd just claim however many I needed.

yeah i'd guess that's why my firm cut me off at 15

ahaha, that sucks. Interest free loan to the government, eh? I'm going to go change mine tomorrow to like 100 and skip town next year. I think wikipedia has a map of non-extradition countries. I should find that.

[MrKappus]

I think Paraguay's one of 'em. But given my record in this thread, you should definitely double-check that.

[pasteurizedmilk]

This is correct. As I stated before, however, you run the risk that the IRS may review your exemptions, decide that you've claimed way too many, and cap your exemptions at some reasonable amount. This will result in their sending what's known as a "lock-in letter" to you and your employer, instructing your employer to withhold taxes at a different rate than what you've claimed on your W-4. They might be annoyed by having to deal with this shit for a summer associate (or maybe they won't care). Just pointing out a possible risk.

You're not going to get in trouble with the IRS, though. Personally I'd just claim however many I needed.

yeah i'd guess that's why my firm cut me off at 15

ahaha, that sucks. Interest free loan to the government, eh? I'm going to go change mine tomorrow to like 100 and skip town next year. I think wikipedia has a map of non-extradition countries. I should find that.

you gonna take that extra 3 grand and run wild eh? props brother. godspeed.

the interest free loan pains me on a fundamental level.

[PKSebben]

This is correct. As I stated before, however, you run the risk that the IRS may review your exemptions, decide that you've claimed way too many, and cap your exemptions at some reasonable amount. This will result in their sending what's known as a "lock-in letter" to you and your employer, instructing your employer to withhold taxes at a different rate than what you've claimed on your W-4. They might be annoyed by having to deal with this shit for a summer associate (or maybe they won't care). Just pointing out a possible risk.

You're not going to get in trouble with the IRS, though. Personally I'd just claim however many I needed.

yeah i'd guess that's why my firm cut me off at 15

ahaha, that sucks. Interest free loan to the government, eh? I'm going to go change mine tomorrow to like 100 and skip town next year. I think wikipedia has a map of non-extradition countries. I should find that.

you gonna take that extra 3 grand and run wild eh? props brother. godspeed.

the interest free loan pains me on a fundamental level.

3 grand? shouldn't I get all my tax back? more like 50 grand. I can't manipulate the FICA stuff, tho. hmmmmmmm

[pasteurizedmilk]

the interest free loan pains me on a fundamental level.

3 grand? shouldn't I get all my tax back? more like 50 grand. I can't manipulate the FICA stuff, tho. hmmmmmmm[/quote]oh you're an associate? hmm. yeah you're out of luck on fica.

[bringmehome]

So what's the rule on this? can you claim exemptions simply on the basis of trying to match your taxes owed with withholding?

[fatduck]

So what's the rule on this? can you claim exemptions simply on the basis of trying to match your taxes owed with withholding?

read the thread?

[NotMyRealName09]

I think people are confusing "allowances" and "exemptions." The law defines what exemptions you can take - you cannot play with those or you will get screwed. Your allowances may be adjusted as needed, ideally to make it so that your federal tax return is $0. This requires math and being sure you understand what you are doing.

I totally took 9 allowances on my W-4 during my summer, because if you take just the normal amount (without running through the tables and such) it withholds as if you were making your salary for the entire year - even though you are in fact in a much lower tax bracket.

If you take 10 or more allowances, your employer has to inform the IRS. However, with taking 9, I still got back a substantial return, so I didn't under-withhold, which is the REAL problem to avoid. It is NOT the number of allowances that causes problems, its whether you under-withhold that gets you into trouble.

I'm not going to explain how, but you can calculate what your federal tax amount will be, then use IRS Pub-15 and its withholding tables to calculate the impact on your paycheck of adding allowances, and adjust accordingly.

Basically, each "allowance" allows you to subtract a certain amount (like $151 or something, its defined in Pub-15) from your base pay, then you plug that number into the table and it tells your employer how much to withhold. As you increase allowances, you decrease the dollar figure plugged into the table, and decrease the amount withheld. In this way you can increase each paycheck, and calculate how much will be withheld over the course of the year. Compare that to what your federal tax burden will be, and adjust if needed.

Again, the IRS isn't actually concerned with how many allowances you take - they are concerned with whether you withheld too little. Past a certain point (I think its 10% below your federal tax) they impose penalties. What they don't want is people taking 30 allowances and having to mail a tax check to the feds for $30,000. That makes them ornery.

Googling leads to ambiguous and often incorrect advice about allowances. You can adjust allowances all you want as long as you end up withholding roughly as much (or more) of your federal tax burden.

If you're scared, don't do it. If you like more money and a smaller tax refund, man up, run the numbers, and spend your extra cash without having to wait to get it back in April.

[NotMyRealName09]

This is correct. As I stated before, however, you run the risk that the IRS may review your exemptions, decide that you've claimed way too many, and cap your exemptions at some reasonable amount. This will result in their sending what's known as a "lock-in letter" to you and your employer, instructing your employer to withhold taxes at a different rate than what you've claimed on your W-4. They might be annoyed by having to deal with this shit for a summer associate (or maybe they won't care). Just pointing out a possible risk.

You're not going to get in trouble with the IRS, though. Personally I'd just claim however many I needed.

edit: this has happened to me before, and i was only claiming like 10 iirc, and not making anywhere near $160k/yr.

If you claim 10 or more, your employer has to specifically inform the IRS. 9 or less, they don't. Thats the only reason the IRS even paid attention. Thats why I stopped at 9. But its not like you'll go to jail - and if you've done your math correctly, the IRS won't say anything. If the math works and 15 allowances is correct, then there is no problem. The IRS will only act if they do the math (they are good at it) and discover you are at risk of under-withholding, thus being subject to penalties.

[fatduck]

This is correct. As I stated before, however, you run the risk that the IRS may review your exemptions, decide that you've claimed way too many, and cap your exemptions at some reasonable amount. This will result in their sending what's known as a "lock-in letter" to you and your employer, instructing your employer to withhold taxes at a different rate than what you've claimed on your W-4. They might be annoyed by having to deal with this shit for a summer associate (or maybe they won't care). Just pointing out a possible risk.

You're not going to get in trouble with the IRS, though. Personally I'd just claim however many I needed.

edit: this has happened to me before, and i was only claiming like 10 iirc, and not making anywhere near $160k/yr.

If you claim 10 or more, your employer has to specifically inform the IRS. 9 or less, they don't. But its not like you'll go to jail - and if you've done your math correctly, the IRS won't say anything. If the math works and 15 allowances is correct, then there is no problem. The IRS will only act if they do the math (they are good at it) and discover you are at risk of under-withholding, thus being subject to penalties.

Interesting about 9 vs. 10, I didn't know that. And you're right I was confusing terminology, we're talking about allowances.

In my case I claimed a bunch of allowances because I was getting combat pay which is tax-free, so I thought hey, why should they be withholding anything? Apparently they didn't buy that, and my allowances got reduced.

[bringmehome]

What about claiming a full exemption? The requirements for that are that you must have not owed any Federal income tax last year (think that applies to most of us), and that you expect not to owe any federal income taxes for 2011.

I think this is line 7 on the W4 if anyone wants to take a look a it?

[thesealocust]

What about claiming a full exemption? The requirements for that are that you must have not owed any Federal income tax last year (think that applies to most of us), and that you expect not to owe any federal income taxes for 2011.

I think this is line 7 on the W4 if anyone wants to take a look a it?

You'll owe the fed thousands of dollars based on your SA salary. Where on earth did you get the idea you could claim a full exemption? The problem is they tax you at rate based on 160K/year income instead of the 20-40 you will likely make for the year as an SA.

[bringmehome]

Well, there's a tax credit for tuition (American Dream Act or something like that), I think that's something like $2,500 or so. Then there's the standard deduction of like 5,800 or so.

I haven't done the math out, but I imagine in total, most 2L SAs won't owe much, if anything at all.

[Sup Kid]

Well, there's a tax credit for tuition (American Dream Act or something like that), I think that's something like $2,500 or so. Then there's the standard deduction of like 5,800 or so.

I haven't done the math out, but I imagine in total, most 2L SAs won't owe much, if anything at all.

The standard deduction reduces gross income -- it is not a tax credit. If you are making $30k/year, you should not declare yourself to be exempt, period.

[Moxie]

Since I read through this thread and just realized I suck at tax language...so I should expect to pay the same rate on my prorated summer associate salary (30-40k) as I would making 160k? Ex: getting 60-65% of salary after tax?

[thesealocust]

Since I read through this thread and just realized I suck at tax language...so I should expect to pay the same rate on my prorated summer associate salary (30-40k) as I would making 160k? Ex: getting 60-65% of salary after tax?

You will have money withheld as though your salary were earned yearly, which means at a high rate based on 160K net pre-tax income. Then, when you file your return, you'll point out to the IRS that your gross income is actually much, much less and request a large refund. They will then cut you a check. A lot of this thread has been about how to cut out the part where your money is taken away and sent to the IRS until feb-march after your SA.

[Anonymous User]

so does anyone know exactly how much a SA in California gets paid biweekly after taxes if their weekly salary is $3k?

I guessing around $4-5k.....right?

[MTU]

so does anyone know exactly how much a SA in California gets paid biweekly after taxes if their weekly salary is $3k?

I guessing around $4-5k.....right?

Assuming you're single, you'll be getting taxed on an estimated salary of approximately $160,000 a year. This puts you in the 28% tax bracket for IRS. So, 72% of 6000 = $4320.

Now, take out State taxes, if you have them. And if you will be working in NYC, there's local tax as well...

[bigben]

I'm pretty sure "tweaking" your exemptions requires fraud. You either have the basis for exemptions or you don't. I'm not saying you're going to the pen for doing it, but the interest income you'd get on about $8k from August-December might not be worth it.

Is the fact that you know your total income for the year will be $30k and not $160k not a valid basis for the exemptions? (This is a legit question, not trying to be snarky).

I know there is a way to remedy this, and you'll want to figure it out. I don't think it falls under exemptions, though.

edit: covered above

[bigben]

[The problem is they tax you at rate based on 160K/year income instead of the 20-40 you will likely make for the year as an SA.

lol no they don't

[NotMyRealName09]

lol no they don't

If you fill out your W-4 on your first day of work as a summer and you follow the form's instructions, that is exactly what will happen. The form will tell you to put down a certain number of allowances, but the W-4 assumes you will be working for the rest of the year. You won't, though.

Here is an example of how to adjust your Summer Associate W-4 withholdings to minimize your federal refund and get more $$$ in each paycheck.

Assume you're single, and the summer associate job is the only job you will work all year. You have no kids, and get paid semi-monthly. Also assume you get paid $2000 / wk, and will be working 12 weeks.

You will gross $24,000 that summer. Lets say you will owe about $1760 in federal taxes, figured using a free online 2010 tax calculator - make sure you do this calculation correctly for 2011. (Gross income - Standard Deduction - Exemptions = Adjusted Gross Income. AGI x Tax Bracket = Federal Taxes owed).

If you run through the W-4 form, http://www.google.com/url?sa=t&source=w ... MDWjFVFBMQ , the form ends up telling you - a single person with no kids and no other jobs - to put down 2 allowances. But as will be shown, 2 allowances leads to massive overwithholding of your cash.

First, what is an allowance? An allowance is a set dollar figure used to reduce your gross income before calculating your withholding. See IRS Pub-15, page 35, table 5 at http://www.google.com/url?sa=t&source=w ... 3y9EIhYUcQ .

So in our example, 1 allowance equals $154.17.

THE MATH

Take your semimonthly gross wages, which for ease we'll say is $4000. Subtract the 2 allowances from that amount. $4000 - 154.17 - 154.17 = $3691.66. Now take that number and go to the tables in IRS Pub-15 to calculate your withholding.

In IRS Pub-15, on page 36 is TABLE 3 - the percentage method tables for semimonthly payroll periods for single people. Pluging $3691.66 into that table, you do this:

Since $3691.66 is greater than $3,571 but not over $7,354, the amount withheld will be $709.35 plus 28% of the excess over $3,571.

Soooo, $3691.66 - 3,571 = $120.66. Multiply by .28 to get $33.79 - this is the "28% of the excess."

Add the "excess" of $33.79 to $709.35, and we get $743.14. This is how much will be withheld from each paycheck with 2 allowances.

If you followed the form W-4 instructions and took only 2 allowances, over the summer the feds will withhold $4458.84 ($743.14 x 6 paychecks). BUT YOU ONLY WILL OWE $1760 or so come tax time!!!!!!!!! That means you'll get a $2698.84 tax refund. Thats straight cash that could be spent on top-shelf liquor all summer long.

So what to do? Play with the numbers! Run the analysis but add more allowances.

Lets try taking 9 allowances (10 or more your employer has to inform the IRS - not a big deal, but I prefer the IRS not put their eye on me.)

9 allowances equals (9 x 154.17 = $1387.53). Subtract from gross wages to get $2612.47.

Goto IRS Pub-15 page 36 table 3. Since $2612.47 is over $1525 but not over $3571, the amount withheld will be $197.85 plus 25% of the excess over $1525.

(($2612.47 - $1525) x .25) + $197.85 = $469.72. That is the amount withheld from each paycheck with 9 allowances. Taking 9 allowances instead of 2 means $273 more per paycheck. Your federal refund will be $1058 instead of $2698.84. Thats money in your pocket.

In our little example, the proper number of allowances is something like 13 or so. Taking 15 leads to underwithholding.

Make sense? (I disclaim inadvertant math / spelling errors, but the procedure is correct.)

Consider it a fun math game that puts hundreds more dollars in each paycheck, which you can then blow on booze or shoes depending on your preferences. Discover Scotch and other fine whiskeys. They're wonderful.

[MTU]

[The problem is they tax you at rate based on 160K/year income instead of the 20-40 you will likely make for the year as an SA.

lol no they don't

Yes they do. Any employer taxes your pay as if you would be making that for the next 52 weeks.

[NotMyRealName09]

Did anyone claim multiple exemptions last summer to reduce withholding, and if so, how many exemptions did you claim? Also, did you ask the firm about doing so beforehand? Finally, if you are subletting in NYC for the summer, but don't use the sublet address for mail or anything else, do you have to pay NYC taxes? Thanks.

Its not the firm's $$$, I don't know why they would ever have any say at all. As long as you've done the math right and are justified in taking the allowances you listed, I don't think an employer can tell you "we don't allow more than X allowances." They are just the middle-man for Uncle Sam, what should they care? Yes, I know the IRS sends "lock-down" letters as discussed above, but only if you are underwithholding. And, if you follow my guide above, you won't.

BUT DON'T ASK YOUR HR PEOPLE. They aren't lawyers. They will be afraid of the IRS and say "no," because they are slaves to forms and speadsheets with built-in assumptions - like full-year employment and the all mighty W-4. Ohhhhhh! The W-4 doesn't say to take more than 2!!!!!!!! Look! It has the word "perjury" on it! One HR lady said I couldn't do more than the form said, that it was "illegal." That was completely incorrect, but how many summers ever challenged her? Her supervisor said he didn't care, and its my ass if I'm wrong, not their's. I took 9 and had bigger paychecks. SCORE! And I still had over a $1000 refund in April because I didn't get super aggressive.

Just submit your W-4 with the correct number of allowances, and if challenged, say you've done the math and are sure you're right, and to give you your money please.

The funny thing is if you use the IRS online withholding calculator and the circumstances are right (huge overwithholding at begining of the year, for example), it will tell you to take 15 allowances or some other random number to balance it all out even though the W-4 would never say that.

If you are in lawschool I really think you should be able to figure out what number of withholdings to take to result in the smallest federal refund possible.

[Sup Kid]

Well this thread was excessively long for a basically simple answer. Thanks NotMyRealName09 for your help.