SAs - Adjust your W-4 withholdings - Maximize Summer Cash!
Posted: Tue Apr 15, 2014 3:57 pm
A thread here about a big refund reminded me of the series of posts I did years ago about adjusting the number of allowances you take on your W-4 when you work as a summer. The basic problem is that the W-4 worksheet assumes you'll be working the rest of the year at your salary, when in fact its only 10 weeks or whatever - you're actually in a far lower tax bracket than the W-4 thinks you'll be. This results in massive over-withholding and you end up with a $3,000 tax refund the next year. Screw that! Pocket that money and spend it now!
Follow this formula (be mindful I wrote it years ago but the method should still work with updated IRS tables - edit: the links still work and take you to the 2014 stuff, sweet) and you can calculate how many allowances you should take. More allowances mean less cash withheld. Bottom line - you can probably take 9 allowances without any problems. But run the numbers yourself to be sure. Here's the link to the thread
http://www.top-law-schools.com/forums/v ... g&start=50
Here's the main thing I wrote below - but I made a few other posts clarifying some things in the original thread so its worth a scan. No need to thank me, but YOU'RE WELCOME.
Follow this formula (be mindful I wrote it years ago but the method should still work with updated IRS tables - edit: the links still work and take you to the 2014 stuff, sweet) and you can calculate how many allowances you should take. More allowances mean less cash withheld. Bottom line - you can probably take 9 allowances without any problems. But run the numbers yourself to be sure. Here's the link to the thread
http://www.top-law-schools.com/forums/v ... g&start=50
Here's the main thing I wrote below - but I made a few other posts clarifying some things in the original thread so its worth a scan. No need to thank me, but YOU'RE WELCOME.
NotMyRealName09 wrote:
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.
