Tax Tips for New Graduates
Please note that this article provides general information only and should not be relied on as official tax advice.
Entering the workforce full time?
Working as an Employee:
If you are starting a job for the first time as an employee, your income taxes may be simple. Your employer will most likely have you fill out a W-4 form that they will use to determine how much income tax to withhold from your paychecks. The W-4 is easy to complete if you’re single and have one job. If you have multiple jobs, the IRS has a tool that can help you make the necessary entries on your W-4 to prevent under withholding of your income taxes.
https://www.irs.gov/individuals/tax-withholding-estimator
Your employer will also withhold 7.65% of your pay to cover Social Security and Medicare taxes (“FICA”), which will show up as a deduction on your pay stub. What you won’t see is that your employer matches this tax, so the total paid to the IRS for FICA between you and your employer is 15.3% of your taxable wages.
If your employer offers benefits such as medical coverage and retirement savings, they should be able to explain how these benefits affect your taxable income.
Tip Income:
Tip income is taxable, and the IRS has special rules for reporting. If you take a job where tips are customary, such as restaurant wait staff make sure you understand how your employer handles tax reporting and withholding. If your employer doesn’t withhold taxes for tip income you may want to consider making estimated payments. Otherwise, you could end up with a large tax bill when you file your return. We strongly recommend that you read the IRS guidance on tip income reporting.
https://www.irs.gov/pub/irs-pdf/p531.pdf
Gig Jobs or Starting your own Business:
Whether working as a contractor (where no taxes are withheld from your payments) or operating your own business, you are “self-employed” and responsible for taxes on 100% of the net income you earn. The biggest tax surprise for a first-time self-employed person is self-employment tax. As your own employer, you are responsible for both the employee and employer portions of Social Security and Medicare tax, which is a total rate of 15.3% of your income. Depending on your total taxable income, it’s not unusual for the combination income and self-employment taxes to amount to 30% - 40% of your earnings. You will need to make estimated payments each quarter to both the IRS and Minnesota Department of Revenue to avoid underpayment penalties, as well as a large tax bill at tax time.
On the positive side, a self-employee individual may be able to deduct expenses directly incurred for the business. The IRS has numerous publications regarding self-employment and business deduction issues. A good starting place is the IRS Self-Employed Individuals Tax Center.
https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center
We’ll be glad to have a quick no-fee consultation meeting if you need advice on setting up record keeping for a new self-employment venture.
Preparing your Tax Return:
During tax season there are numerous commercials for online tax preparation services. These programs all work very well, and many offer free filing services for simple returns below certain income levels. The IRS website home page also has a link for free income tax services. Note that some online services will charge for a Minnesota tax return even if the IRS return is free, so make sure you know the fee structure up front.
We’ll be glad to help if you need professional assistance.
