November 23 2021 - When you start working, you also start paying taxes. While you'll enjoy steady paychecks, so will the state and federal governments. Becoming a worker means you'll become a taxpayer, which means paying federal income taxes and state income taxes.
In addition to these taxes, you'll also pay for Social Security and Medicare. How much you pay depends on where you live and your tax bracket, but no matter what, you will be legally responsible for paying your taxes. Luckily, there are ways to get the most out of your tax return.
Most people you know don't owe taxes when they file every year; in fact, most people receive money back from their taxes because they had too much withheld from their pay. When you start a job, you'll fill out a W-4 which tells your employer and the government how much federal income tax will be taken out of your paychecks to pay your taxes.
The amount you pay depends on the number of allowances you claim on the form. Make sure you carefully read the instructions. Since this is your first job, you've likely never seen this form before. From there, claim as many allowances as possible to keep your withholding down so you can earn more on your paychecks.
If you start a job in the middle of the year, ask your employer to use the part-year method to figure out withholding. The part-year method sets withholding based on how much you'll earn that year instead of multiplying your salary by the number of months in the full year. Doing so allows you to earn a larger paycheck when you're just starting.
Get a 401(k)
If your new company offers a savings plan, make sure to join it as soon as that benefit kicks in. Your company might automatically enroll you to help you save for retirement. Many companies match part of your contribution to your retirement plan. Make sure you contribute enough to receive the company match so you can receive as much money as possible towards your retirement.
If you have a traditional 401(k), your pre-tax salary will go into the plan, which means you can get a guaranteed return on your investment.
Your company might also offer a Roth 401(k), which could also be a great option. With a Roth 401(k), your after-tax earnings go into the plan. All withdrawals can be tax-free when you retire, which will help you save money in the future.
Depending on your salary, you might be able to earn a tax credit on contributions to your retirement plan. Your accountant will use professional tax software to determine if you are eligible.
Get a Flexible Spending Account
If your employer offers a Flexible Spending Account (FSA), take advantage of it. These plans allow you to put part of your salary into an account you can use to pay for medical bills. Any money you put into this account is free from being taxed.
Buy Company Stock
Your employer might offer you the opportunity to buy company stock at a discount. However, the tax implications are complex, so it's best to work with an advisor or accountant before you buy any stock. However, these investments can be beneficial because Incentive Stock Options (ISOs) require no tax under regular tax rules in the year you buy stock.
Get a Health Savings Account
Health savings accounts (HSAs) are a type of healthcare plan most employers offer. These offer you a high out-of-pocket deductible with a tax-free savings account. If you get an HSA, your employer makes deposits into your account so you can withdraw the money and use it to pay for medical bills.
Deduct When You Can
When you get your first job, you might not be aware of all of the deductions you can claim when you file your taxes. Several deductions are overlooked by people who have been working for decades. Instead of paying more than you have to in taxes, consider taking these deductions when possible:
Charitable contributions: If you donated to a charity, you could deduct it from your tax returns. These contributions can be anything from donating clothing to the ingredients you purchase for a bake sale. The IRS has standard rules for donating items that don't have a specific dollar amount attached to them. For example, you'll need to check with your accountant or tax preparer to determine how much you can deduct for donating clothing.
Student loan interest: Even if you had help paying some of your student loans, you could still deduct the interest you paid on the loan.
Child and dependent care credit: If you have a child or dependent, you can claim a credit that allows you to decrease your tax liability and increase your refund.
Learn about Tax Credits
Tax credits are more beneficial than tax deductions because they offer a dollar-for-dollar reduction of your tax liability. If you get a $1000 credit, then you will get $1000 off of your taxes. When it comes to claiming tax credits, many Americans don't know the options they have available to them.
You can learn about the different types of tax credits available by doing a quick search online and talking to a CPA who can help you determine which credits you qualify for. Common tax credits are:
- Earned Income Tax Credit
- Child and Dependent Care Credit
- American Opportunity Credit
- Lifetime Learning Credit
- Energy-Saving Credits
Saving Money on Your Taxes
While you will always have to pay taxes for as long as you earn a paycheck, there are ways to help you get more back on your tax return and reduce your tax liability for the year. To learn about all of the options available to you, talk to a CPA next tax season instead of filing your taxes online and by yourself. These professionals may be able to help you find credits and deductions an automated system cannot.
Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. Matt is passionate about marketing and business strategy and enjoys the San Diego life, traveling and music.