How Do I Pay My Tax?

Federal income tax is collected on a "pay-as-you-go" system. This means you must pay tax on the income you earn at the time you receive it. There are two ways to pay your tax. You can have tax withheld from your wages and you can make estimated tax payments on income that is not subject to withholding.

Withholding on wages. Your employer will generally withhold tax from your paycheck and deposit it in a federal bank. The amount withheld is based on information received from your completed Form W-4, Employee's Withholding Allowance Certificate. The form and its worksheet will help you to calculate the proper "withholding."

If, at the end of the year, you have not paid all of the tax due, you may be subject to a penalty for failure to pay estimated tax. To prevent this, you can have more tax withheld by revising Form W-4 (discussed later) or by making estimated tax payments.

Estimated tax payments. Estimated tax payments are generally required if no tax is withheld from your income. For example, tax is not generally withheld from self-employment and investment income. If you are self-employed or receive investment income, you may need to make estimated tax payments.

Generally, the law requires you to pay estimated tax for 2001 if you expect to owe $1,000 or more when you file your return, unless the amount you will have withheld is at least:

1. 90% of the tax to be shown on your 2001 income tax return, or
2. 100% of the tax shown on your 2000 income tax return.

If you need to make estimated tax payments, get Form 1040-ES, Estimated Tax for Individuals. It has a worksheet and instructions that will help you estimate your income tax for the coming year and figure how much estimated tax you need to pay. Usually you divide the amount you need to pay for the year by four and make four equal payments of tax. These are due on April 15, June 15, September 15, and January 15 (of the following tax year). If the due date falls on a Saturday, Sunday, or legal holiday, the payment will be on time if it is made on the next day that is not a Saturday, Sunday, or legal holiday. See Publication 505, Tax Withholding and Estimated Tax, for more information.

How Does My Employer Decide How Much To Withhold?

Your employer generally uses information received from you to figure how much of your pay to withhold for federal income tax. When you get a job, one of the first things your employer will do is ask you to complete Form W-4. Form W-4 includes three types of information that your employer will use to figure your withholding.

1. Whether to withhold at the single rate or at the lower married rate.
2. How many withholding allowances you claim (each allowance reduces the amount withheld).
3. Whether you want an additional amount withheld.

An example of a filled-in Form W-4 appears at the end of this publication.

Claiming withholding allowances. Use the Personal Allowances Worksheet on page 1 of Form W-4 to figure your withholding allowances. The worksheet is there to help you figure the correct number of withholding allowances you can claim. For many students this will be one allowance. The worksheet is for your own records. You do not have to turn it in to your employer. You can have more tax withheld by claiming fewer withholding allowances.

If you work for more than one employer at a time, you will be asked to complete a Form W-4 by each employer. If, after reading the Form W-4 worksheet, you decide you are entitled to claim one allowance, claim one allowance at the higher paying job and zero allowances at your other job. Do not claim the same withholding allowances at both jobs because not enough tax will be withheld during the year.

Additional amount. You want to have enough tax withheld so you won't have to make estimated tax payments, as explained earlier, or be charged an estimated tax penalty for not paying enough tax during the year.

To make sure you are getting the right amount of tax withheld, get Publication 919. It will help you compare the total tax to be withheld during the year with the tax you can expect to figure on your return. It will also help you determine how much, if any, additional withholding is needed each payday to avoid owing tax when you file your return. If you do not have enough tax withheld, you may have to make estimated tax payments, as explained earlier.

What If My Withholding Does Not Match My Tax?

Your withholding probably won't match your tax liability exactly. So when you report your income and figure the tax on your tax return, you will usually find that you either underpaid or overpaid your tax. If you owe, you should pay the balance due when you file your return. You can pay by check, money order, or credit card. If you paid too much, the IRS will issue you a refund after you file your return. You can also request direct deposit of your refund. For more information, see the Form 1040, Form 1040A, or Form 1040EZ instructions.

Can I Ask My Employer Not To Withhold Tax?

Do you have a part-time job but are not earning enough to be required to file a tax return? If so, you can ask your employer not to withhold income tax for 2001 by claiming exemption from withholding if both of the following are true.

1. For 2000 you had a right to a refund of all income tax withheld because you had no tax liability.
2. For 2001 you expect a refund of all income tax withheld because you expect to have no tax liability.

Students are not automatically exempt from withholding. You can claim exemption only if both of the above statements are true.

Dependents. You cannot claim exemption from withholding for 2001 if someone will be able to claim you as a dependent on his or her tax return for 2001 and your 2001 income will be over $750 and will include more than $250 of unearned income.

Claiming exemption. You claim exemption from withholding on Form W-4. Fill in the identifying information at the top of the form and skip lines 5 and 6. On line 7 write the word "EXEMPT." Then sign and date the form.

Generally, the exemption from withholding expires on February 15 of the year following the year for which you claim exemption. If you remain eligible and want to claim exemption from withholding for that following year, you generally must give your employer a new Form W-4 by February 15 of that year.

If you claimed exemption from withholding but your situation changes (for example, you received a raise in pay or you are working more hours), you have 10 days from the day you reasonably believed you were no longer exempt from tax to give your employer a new Form W-4. You should claim the correct number of withholding allowances on the new form so your employer will withhold the correct amount of tax.

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