How to fill out form W4 when I'm earning $1600 extra income per month?

Question

August 22 was my last day at a job that paid $76,000 / yr. Afterward, that job is supposed to pay me $400 / wk for consulting for $1,600 / month. At the new job (which I started on Aug 26) I'm making $80,000 / yr.

On the Form W-4 I filled out, there was a section for "additional amount, if any, you want withheld from each paycheck". I'm thinking I could use this section to withhold taxes on the consulting money I'm getting for as long as I'm getting it. It's just not clear to me how much I need to withhold.

Any ideas?

Thanks!

Answer 1

I have a related issue, since I have some income which is large enough to matter and hard to predict.

Start with a best guess. Check what tax bracket you were in last year and withhold that percentage of the expected non-withheld income. Adjust upward a bit, if desired, to reflect the fact that you're getting paid more at the new job. Adjust again, either up or down, to reflect whether you were over-withheld or under-withheld last year (whether the IRS owed you a refund or you had to send a check with your return).

Repeat that process next year after next tax season, when you see how well your guess worked out.

(You could try pre-calculating the entire tax return based on your expected income and then divide any underpayment into per-paycheck additional withholding... but I don't think it's worth the effort.)

I don't worry about trying to get this exactly correct. I don't stress about lost interest if I've over-withheld a bit, and as long as your withholding was reasonably close and you have the cash float available to send them a check for the rest when it comes due, the IRS generally doesn't grumble if your withholding was a bit low.

(It would be really nice if the IRS paid us interest on over-withholding, to mirror the fact that they charge us interest if we're late in returning our forms. Oh well.)

Despite all the stories, the IRS really is fairly reasonable; if you aren't deliberately trying to get away with something, the process is annoying but shouldn't be scary. The one time they mail-audited me, it was several thousand dollars in my favor; I'd forgotten to claim some investment losses, and their computers noticed the error.

Though I still say the motto of the next revolution will be "No taxation without proper instructions!"

Answer 2

If you're making $80k, and you're consulting for an extra $400/wk or $20,800/yr, you're earning a total of $100,800. That's assuming you do it for a full calendar year of course. Either way, assuming you can deduct/exclude at least $11k of income (as almost everyone can), you're paying 25% on your marginal dollars. (This also assumes you're single; if you're married/filing jointly, this may not be true.) Note, you're right at the edge of the 25% bracket if you earn this in a full calendar year - but if you have a 401k, health insurance, or other reductions you'll be fine. Additionally, for this year you'll be under (again assuming single and no other income) because you aren't earning a full year's worth.

Assuming your $80k is precisely taken care of by your regular withholding, then, you will literally pay 25%*$400/week in additional taxes - $100 per week. So if you are paid biweekly, you need to add $200/week in withholding on your W-4. If you expect to overpay taxes (if you own a house with a mortgage for example, you often do), you can reduce it some, but adding $200/biweekly paycheck should bring you right to where you were before the extra income.

The general rule is to calculate your marginal (not effective) tax rate before the new income, assuming default withholding takes care of that, and then withhold the marginal rate for the new income [checking that the new income doesn't push the marginal rate up - if so, calculate in two parts, the part in the lower marginal rate and the part in the higher marginal rate].

You can google "2014 tax brackets", or look at the IRS tax tables for detailed information about marginal rates.