Settling up with Uncle Sam
The 411 on filing tax returns and those mysterious deductions on your paystub
When you were a child, you couldn’t understand why your parents were grumpy while working on their tax returns.
When you got your first paycheck from your part-time job, you wondered why this FICA person got a cut of your wages.
Now you’re an adult, and you still don’t understand who FICA is; worse yet, you’re responsible for filing a tax return too.
To demystify it all, here’s the lowdown on everything you need to know to pay your taxes.
How do I know whether I even have to file a tax return?
When you were a poor college student, you might not have had to file a 1040 because your parents had you covered. But if you can no longer be claimed as a dependent on somebody else’s tax return, you probably need to file your own federal tax return.
Single people who earned $13,850 or more during 2023 need to file a federal tax return. People with self-employment net earnings of $400 or more must also file.
Click here, and Uncle Sam’s Interactive Tax Assistant will pose a series of questions to determine whether you need to file a federal tax return.
I am a poor college student. My friend said I might get a refund if I file a return. Is that true?
If you earned money from a part-time job and your employer withheld federal income tax from your wages, you will likely be due a refund if you earned less than $13,850 last year. It’s worth filling out your tax return to find out.
Can’t I just hire somebody to do my taxes for me?
Those tax prep firm commercials make it tempting to hand this task off to someone else. Check out how great Jackson Hewitt made Steve feel:
Sure you can hire somebody and end up dancing on top of their desk like Steve, but you need to weigh whether paying for that sort of service makes sense.
For one thing, you ought to have a basic understanding of how filing taxes works, and it’s easiest to acquire that understanding while your financial situation is relatively simple. For another thing, even if a professional prepares your return, you’ll still have some work to do anyway–like gathering all the documents you need and reviewing the return once it’s ready to ensure it’s accurate.
If you’re nervous about doing it yourself, or you have a more complex tax situation, it may be worth having a professional do your taxes once so that you can see how it all works (I did that the first year I was self-employed). But the following year, consider using the previous tax return as a template and doing it yourself.
Okay, I’ll do my taxes myself. How do I do that?
This website outlines the whole process step by step.
Can tax software make tax filing a manageable do-it-yourself project?
Many software pals–like TurboTax, H&R Block, and Tax Slayer–stand ready to help you get your tax job done.
NerdWallet has reviewed and rated them all–check out their guide to pick the one that might be best for you.
Somebody said that I can file my taxes online for free. Is that true?
IRS Free File allows qualified taxpayers to prepare and file federal income tax returns online using guided tax preparation software. It’s free for taxpayers whose adjusted gross income is $79,000 or less.
This IRS webpage explains everything and helps you choose which trusted partner fits you best. (It’s wise to access these providers directly through the IRS site to ensure you don’t land on a page of a company that appears to offer free tax filing but really charges for their service.)
With all these online filing options, why does my mom still use paper forms?
Maybe she’s old school. Filling out paper forms with an erasable pen can feel like doing a crossword puzzle, and perhaps she likes having a physical copy for her records.
The downside to filing a paper return is that it can take up to 6 months for the IRS to process it–a long time to wait if you’re expecting a refund.
My roommate said we need to file three separate tax returns. What’s he talking about?
Depending on where you live, you may need to file a state tax return and a local tax return in addition to your federal tax return.
Most people must fill out at least two tax returns since, as of 2023, only seven states don’t require a state income tax return. (This H&R Block page shows which ones.)
If your municipality imposes a local earned income tax, it’s typically deducted automatically from your wages, and you can tell from your paystub. If you’re not sure, call your township or county government office to ask what the deal is.
What forms do I need to file my tax return?
By now, you should have received a W-2 form from every employer you worked for in 2023 and earning and interest statements from banks and other financial institutions, which come as 1099 and 1099-INT forms. If you haven’t, it’s time to follow up.
Typically people don’t itemize deductions until they have a mortgage. This NerdWallet article explains standard deductions and helps you evaluate whether itemizing deductions would benefit you. If you itemize, you’ll need to gather documentation for mortgage interest, state and local taxes paid, charitable donations, and other tax-deductible expenses.
A word to the wise–it’s worth ensuring the data is correct on the forms you receive from financial institutions and your employer(s). These forms sometimes contain mistakes. (One young taxpayer I know discovered a wage increase hadn’t been implemented as promised when she reviewed her W-2 .) If something’s off, follow up promptly with whoever issued the document to get the error corrected.
When is all this stuff due? And what happens if I hand it in late?
The deadline to pay the federal taxes you owe for the 2023 tax year is April 15, 2024.
If you request an extension, your tax return due date is pushed to Oct. 15, 2024. But even though this gives you more time to file your return, the taxes you owe are still due on April 15. So just bite the bullet and file on time.
If you owe taxes and don't file, there are consequences–the IRS levies a failure-to-file penalty and a late-payment penalty, plus it charges interest on what you owe. NerdWallet explains what happens if you visit this circle of hell.
I filled out my return, and I still owe Uncle Sam money. What do I do?
First, pay Uncle Sam what he’s due by midnight on April 15, or else you’ll owe him even more money.
Then file a new W-4 form with your employer to increase your withholding because not enough money is being withheld from your paycheck to cover your federal income tax tab for the year. (No need to be afraid–this NerdWallet article walks you through how to adjust your withholding.) This will hopefully help prevent you from owing money next April for the 2024 tax year.
Woohoo! Uncle Sam owes me a refund. What should I do?
Since it’s money you weren’t expecting, you could put it right into your savings account. Maybe you can put it towards a big ticket item or reward yourself with a little something for being a responsible citizen.
Some people like getting a tax refund yearly because the extra lump sum makes them feel richer. But you could have had those funds in your bank account sooner, earning some money for you. So if your refund was large, consider adjusting your withholding by filing a new W-4 form with your employer. (This NerdWallet article walks you through how to adjust your withholding.)
Do I really need to keep a copy of my return once I file it?
Whether paper or electronic, you must keep copies of your returns for at least three years. And hold onto any documentation that goes along with them, which you’ll need if you ever get audited.
You never know when you may need copies of your return for other purposes, like applying for a loan.
Can you explain what all those deductions on my paystub are?
The abbreviations on paystubs can turn deductions into an alphabet soup.
The mysterious FICA you may have been wondering about is shorthand for the Federal Insurance Contributions Act, which is what funds Social Security and Medicare.
Here’s a basic rundown of paystub deductions:
Federal income tax. By law, you must pay your federal income tax as you earn your money. Your employer withholds the amounts from your pay each period based on your W-4 calculations.
State tax: If your state has an income tax, you must also pay it as you earn. So your employer withholds a percentage of your gross earnings from each pay and remits it to the state on your behalf. (For instance, in Pennsylvania, the deduction is 3.07% of gross earnings.) It’s just as well; you wouldn’t want to pay a large lump sum annually.
Local income or wage tax: If your city or county taxes earned income, they typically follow the lead of the federal and state government and have your employer withhold it every pay period. In my municipality, the deduction is 1% of gross earnings.
Social Security tax: If it’s not labeled as FICA, sometimes it’s labeled as OASDI because it stands for old-age, survivors and disability insurance. You pay this tax now to earn credits for Social Security benefits later. It’s withheld at a rate of 6.2% of gross earnings.
Medicare tax: This tax revenue goes to cover health insurance for people who are 65 or older and people with disabilities. Again, you pay this tax now to be eligible for coverage when you’re old or should you become disabled. It’s withheld at a rate of 1.45% of earnings.
Your paystub may also include other deductions like a mandated contribution to a state unemployment insurance fund, health insurance premiums, or premiums for optional coverages like disability insurance. If you ever don’t understand a deduction, ask someone in your HR or payroll department to explain it to you.
All of these deductions make driving for Uber look good; then I wouldn’t have all this stuff taken out of my pay.
Ride-share drivers and others who are self-employed still have to pay income taxes, as well as Social Security and Medicare taxes (In fact, since they have to cover the employer portion of the SS and Medicare taxes, they pay 15.3% of their net earnings to Uncle Sam to cover these taxes).
And since taxes aren’t automatically withheld for self-employed people, they must pay estimated taxes on their earnings quarterly. It can be a pain; in many ways, it’s easier when your employer automatically withholds taxes for you.
I’m feeling very responsible now that I understand more about paying taxes. What else can I do to be smart about handling my earnings this year?
Check to see if your employer offers a 401K, which allows you to set tax-free earnings aside now so that these savings have decades to grow without being subject to taxes.
At the very least, you should contribute at least enough to your 401K to get the company match–for example, if you contribute 6% of your earnings to your 401K, your employer may contribute an additional 3% of your earnings to your 401K.
I’ll go into 401Ks in greater detail in a future issue. But in the meantime, your HR people can walk you through everything you need to know to start contributing to a 401K.
Breaking up is hard to do, but according to author JP Pokluda, if the end goal of dating is marriage, you should break up with someone as soon as you know you’re not going to marry them.
He says, “One of the ways people tend to get this wrong is that they delay breaking up. They might try to wait for the ideal time or place to break up (whatever that would be)...But the best time to do it is truly now…Every date you go on, and every day that goes by with the two of you still together, just adds to their excitement and their certainty that this relationship is going to last…By trying to let them down easy, you inadvertently make it harder.”
Pokluda also says that when you break up with someone, you should tell them why: “Don’t leave them wondering what went wrong or what, if anything, they could have done differently.”
In the olden days, moms used to clip newspaper articles for their kids if they thought it was something they needed to know. I’m watching for things you might have missed that may be helpful to you.
This week’s clips:
Those popular “get laid off with me” videos might be cathartic but…this HuffPost article explains how they might create legal risks for those who post them.
Like it or not, discomfort–whether it’s because of a fight with a friend or a conflict at work–is a normal part of life. This Life Kit episode (18-minute listen) discusses how to prevent discomfort from escalating into distress.
What kind of things do taxes pay for anyway? This concise explainer from the Consumer Financial Protection Bureau gives you a rundown.