New employee - withholding

Question

I'll try to keep it short, first a few facts. I moved to the US last summer, but didn't get my visa (intracompany transfere) sorted until before Christmas. This (January) has been the first month I've gotten paid from my company's US branch and not from the country I come from.

Company's accountant in origin country is not very knowledgeable of how the tax system works here, neither am I. Company got an external company to take care of the payrolls, but they don't see to know too much either.. The lady from that payroll company emailed me asking me to tell her how much withholding should they put down in my monthly salary. I told her I don't have a clue, so she told me best option is to go to a tax advisor.

Now, I don't mind to pay some money for this specialist, but I just wanted to first ask your opinion here, as it may not be necessary. After doing some reading online I've seen some RSA websites saying I have to give my employer a W-4 and this and that, but as I said, company account doesn't have a clue what that is. I've also seen that I may be able to calculate the withholding by filing up that form for myself and then looking at what the results say (or do it online on the RSA withholding calculator)... No idea if this is doable or not.

A few more facts, I did get my payslip for this month, without telling this payroll company anything about my withholding, but obviously they did something as I can see I'm paying quite a lot of taxes. Here the numbers, not sure if they are legit, or I'm paying too much, or too few...

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• Annual gross salary: 90K

This month:

• Total deductions: 7500.00
• Fed (S/O): 1471,98
• OASDI: 465.00
• Medicare: 108.75
• NY (S/O): 416.11
• New York City Res.: 258.40

• NY Dis. Ins. Deduction: 2.60

• Net Checking: 4777.16

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A couple more facts:

• I rent an apartment, around 2k everymonth
• My wife is here with me, but she is still waiting for her work permit, so not likely to work for the next 2 or 3 months at least
• My company pays $650/month for my health insurance, but I top it up with around $70 to get Platinum insurance.

Not even sure what I'm asking here, whatever thoughts or feedback you have will be appreciated, even if you guys just tell me to go and see a tax specialist (suggestions!?).

Thanks!

Answer 1

My wife and I have struggled to get our withholding just right over the last several years (due to one-time things like selling stock and cashing out savings bonds, we have owed every year, but last year we were just about right on). It is a royal pain for a lot of reasons.

The first is that most companies just don't/can't withhold for you properly. You really need to keep an eye on the amounts and make sure that it's about right (withholding typically has two parts: allowances and additional withholding. The allowances try to estimate your tax burden by seeing how many people are dependent on your income. The fewer allowances, the more taxes you will have withheld out of your check. You can also chose to have additional money withheld, which is just taken out of your check regardless of how many allowances you have).

The first thing you need to do (and you can do this yourself) is see what your approximate taxes will be. You can find estimated brackets through a number of financial websites, but the one I will be using is here. If you are interested in the 2016 tables, the IRS has them published here.

Looking at Table 2, and assuming your wife does not work at all this year, your 90k salary will put you in the 25% bracket (note, these brackets are graduated, meaning for the first 18,650 you are paying 10%, from 18,651 to 75,900 you are paying 15% and from 75,900 to 90,000 you are paying 25%). This would mean on your salary, you will need to be paying a Federal Income Tax of around 13,977.5 over the course of a year. Assuming a check every 2 weeks, that would be around 537.60 a pay period. Monthly it's around 1164.79 (I used the 2 week timeframe because it makes the math easier, so adjust as needed).

Looking at the numbers you provided, I think your employer is withholding for you as if you were single. If you were single, you would be needing to pay 18238.75 a year in taxes, or around 701 a 2 week pay period or 1519 a month (approximate).

Now, let's say your spouse makes 40k a year. This would increase your joint tax burden to 18977.5, and together you would need to pay 729.90 per 2 week period, or around 1581.46 a month (approximate).

Why is it sometimes difficult to get these numbers right? Well, let's say your wife making 40k has everything filled out correctly with her employer. When they are calculating her withholding, they have zero knowledge of your income. They may see her 40k yearly salary, and think they need to withhold 5067.50 over the course of the year from her. When your employer looks at you in a vacuum, they think you need to withhold 13,977.5 total. Combined, that's 19045, which is a little more than what you'd need.

It gets more problematic if you cross a new tax bracket, or make around the same amount of money. Let's say, instead, your wife made $80k, and you still make $90k. Individually considered (filing jointly), your tax burdens would be 13977.50 for you and 11477.5 for her for a total of 25455. In practice, you would have a tax burden of 34484.5. That's a significant difference. My wife and I are in a situation like this, where we make nearly the same amount of money. Some employers (like ours, thank god) offer an option to "Withhold at a higher single rate." If you take this same problem (80k and 90k salaries) but withhold at single rates, you have employers withholding 18238.75 for you and 15738.75 for her, totaling 33977.5, which is a heck of a lot closer than 25455.

Hopefully all my math is right, on these.

The important thing to take from this analysis is that it's usually in your best interest to have your tax withheld at close to the right amount for the year. Nothing sucks more than realizing you own several thousand dollars you weren't prepared for (especially since the IRS does charge fees if you owe enough money). I've always found it better for peace of mind to overpay taxes than underpay them. I'm perfectly fine letting the government have an interest free loan for a bit.

Answer 2

That $7500 should be labelled total before deductions. Your OASDI (the official name for Social Security) and Medicare payments are definitely correct; those are fixed percentages of your gross pay. Your Federal income tax withholding appears to be calculated at the rate for a single person with 0 allowances (probably indicated by your 'S/O') which is probably over-conservative for your case. The US system is that your actual income tax (not SS/Medicare as above) can be affected by many factors your employer doesn't know about, and sometimes you don't know yourself in advance, so the withholding from each paycheck is an estimate and when you file your return after the end of the year you get a refund if withholding was too much (usually about 3/4 of filers) or pay the difference if withholding was too little. I don't know exact NY state and NYC (city) rates but they look plausible.

If you were working in US part of last year, even though you were paid from abroad, you probably need to file part-year returns for that. US taxation of foreigners is even more complicated than domestic (which is quite complicated enough, thank you) and can vary in important details depending on the country you are from and you and your wife's exact status(es) -- in particular residence for tax purposes is not the same thing as 'permanent resident' status for immigration. I suggest if you have some time to waste look at the main IRS publication on this, Pub 519 on the web or downloadable from Forms&Pubs. After looking at that you probably will want to seek help from a tax specialist; look for one with experience in taxation of aliens and preferably those from your country. As a small silver lining, NYC is probably the best place to be looking for this -- the metro area has substantial numbers of people from practically everywhere on Earth (and beyond, if you believe the 'Men In Black' movies!)

You might also look at In US, is it a good idea to hire a tax consultant for doing taxes?

Answer 3

OASDI and Medicare are flat rates, so withholding doesn't matter for those. I don't know about any of the NY taxes.

The lady from the payroll company should be able to process your W-4, so fill one out and send it to her. Form W-4 (PDF).

It looks like you are paying more income tax than necessary. At $90K annually and married filing jointly, you should pay only about $11k in income tax. That's about $1k a month, but you are withholding $1471.98. That's only bad in that you're losing the interest you'd get if you banked it. If that doesn't bother you, you can just keep doing that. You'll get a nice tax refund next year.

2016 rates.