Multiple Jobs Tax Withholding: Tailor Tax Withholdings if You Work Multiple Jobs
Our topic focuses on federal income tax withholding from your paycheck, or more accurately “paychecks.” Our discussion will primarily emphasize special considerations and income tax withholding decisions for worker with multiple jobs.
The employee needs an overall withholding perspective, so we begin with a brief discussion of withholdings for other than the income tax.
Payroll Tax Withholding
FICA tax applies equally to employees and employers. The Federal Insurance Contributions Act imposes a 6.2% tax on gross wages. Both employer and employee pay this tax.
The FICA tax applies to a maximum of wage earnings of $142,800 in 2021. The wage base goes up every year. The 2022 maximum is $147,000. Contribution and Benefit Base - Social Security.
The social security program will eventually distribute benefits primarily funded with FICA funds.
If you’re self-employed, you basically pay both halves of this tax – 12.4% of your business income up to the annual maximum.
The self-employed also get an adjustment on Form 1040. This allows you to deduct the “employer-equivalent of your self-employment tax in figuring your adjusted gross income.” See Self-Employment Tax (Social Security and Medicare Taxes) at irs.gov.
Your retirement planning for benefits under Social Security will reflect payments made as an employee and/or self-employed individual. The combination of wages and business income will affect your payments into the program. They also will impact your benefits under the program, assuming longevity sufficient to get benefits.
Many Dimensions of Payroll Tax
The payments constitute taxes, not assets of those paying into the program. It is possible to pay into the program and not reap benefits.
It is possible that a significant portion of benefits eventually received under the program will be subject to income tax. There is a special provision in the Internal Revenue Code dealing with when social security benefits are taxable. Up to 85% of your benefits may be taxable under federal rules. See Sec. 86.
States often exempt social security benefits. California and New York are two examples.
There is also the 1.45% Medicare tax which applies without a maximum in earnings. This tax applies to both the employee and employer. The self-employed pay 2.9%.
The employer withholds based on your W-4 but also pays into the program. The employer might get some relief, such as the relatively generous employee retention credit which can offset the employer’s payroll tax. See Employee Retention Credit at irs.gov.
The self-employed pays into the program via quarterly estimated payments. See Top 10 Self-Employed Write-Offs You Should Know When Filing Taxes and A Quick Tax Guide for Self-Employed Individuals in 2021.
The self-employed individual’s obligations for self-employment tax are computed on Form 1040 Schedule SE which reflects business income from Schedule C and farming income from Schedule F. Extra withholding at the job may be a way to pay self-employment and income taxes on business income.
Income Tax Withholding: Wage Income
Tax situations are often not simple. The income tax has many special rules affecting income and deductions. The working two jobs tax bill can be high with the multiple kinds of taxes and income reaching higher rates.
We can help you understand tax implications and plan for increased income from two separate jobs or a new business at tax time.
Employee’s Withholding Form: The W-4
The IRS has a re-designed Form W-4 as of December 2020. The employee provides this form to the employer. The W-4 is not filed with the IRS. Withheld taxes are a minus to taxes due when you file, or they may increase your refund.
If you have not provided a new W-4 since it was revised, you may want to give your employer a new form, though not required. Many IRS forms have annual due dates – but not Form W-4, which has a whenever-needed premise.
The new form tries to be more accurate in its five steps. The old form had seven steps.
The simplest approach to the W-4 is to fill in your personal information and then sign and date it as an employee. The employer will then withhold under relatively simple assumptions that may or may not be accurate.
It is possible the end result will be zero withholding. Instructions to the 2021 Form W-4 indicate as justification for no withholding: no federal income tax liability in the previous year and an expectation of no income tax in the current year. In this case, you’re to write “Exempt” in Step 4(c) while also completing steps 1(a), 1(b) and 5.
In this case, while the W-4 doesn’t normally have a due date, the instructions to the 2021 W-4 tell you to submit a new W-4 to the employer for 2022 by February 25, 2022.
Income Tax Withholding: Step-by-Step
The 2021 W-4 Form is divided into 5 Steps plus instructions:
Step 1
Taxpayer information and filing status are asked. Another portion asks if the taxpayer’s name matches his or her social security number. If not, you’re asked to contact the Social Security agency to assure you get credit under the wage withholding system.
Step 2
There are details unique to you as a taxpayer. For example, the 2021 instructions for Step 2 deal specifically with our topic of the employee having multiple jobs or a spouse working.
Step 2 guides the reader to three mutually exclusive routes:
- The first is the “estimator” which it describes as the most accurate (prior to going to Steps 3 and 4). It is also described as necessary if there is self-employment.
- The second is a multiple jobs worksheet within the instructions, which is described as “roughly accurate.” The instructions add that its purpose is to compute one figure representing an incremental tax for all jobs. It directs you to add the result to the highest-paying job.
- The third alternative is described as accurate for two jobs with similar pay, and says you can use this route for both jobs.
Step 3
The new form asks the number of dependents. The focus is on reducing your withholding due to the child tax credit and credit for other dependents. The credit is $2,000 for qualifying children under age 17 plus $500 for other dependents. Limits can apply to higher-income taxpayers. See IRS Pub. 501 Dependents, Standard Deduction and Filing Information, p. 11.
Step 4
Here you can factor in other income that would not necessarily be subject to the employer’s withholding. Withholding is simpler than making estimated tax payments quarterly on Form 1040-ES.
Step 4 has a new feature – highlighting whether you itemize.
Having a perspective of your itemized deduction picture can be helpful in reducing the tax withholding. Keep in mind you claim the higher of itemized deductions or the standard deduction, which is as follows:
- 2021 Single or married filing separately - $12,550 ($12,950 in 2022);
- 2021 Married filing jointly or surviving spouse - $25,100 ($25,900 in 2022);
- 2021 Head of household - $18,800 ($19,400 in 2022).
Employee business expenses are in the itemized category and are basically nondeductible, temporarily due to the 2017 Tax Cuts and Jobs Act.
Business expenses as an independent contractor are deductible on Schedule C; so if your second job is a new business, the distinction is important in terms of deductibility. While your employer withholds tax, your clients don’t. Having extra withholding from your job to pay/help pay your taxes as an independent contractor is permissible.
Some major components of itemized deductions: home interest expense within limits, some state and local taxes (up to $10,000), some medical, some investment expenses. Claiming itemized deductions in alternate years can be advantageous.
Noteworthy
An important portion of Step 4 has a place for adding in such income as dividends and interest, as well as any additional tax you’d like withheld. Dividends are subject to special rules and may even be free of income tax for persons with lower income.
Step 5
Even though the W-4 isn’t filed with the IRS but rather is submitted to the employer, the form has a place for signature and date.
The form isn’t valid unless signed.
Compliance Perspective
The W-4 focuses on reasonably estimating withholding and what is likely owed. But another area of focus, one with its own complexities, is avoiding penalties. Penalty avoidance incorporates current tax and the prior year’s tax. See Form 2210 with instructions.
Planning Perspective
Multiple jobs tax withholding and how to file taxes for two different jobs can be complex. We are here to help with these complexities of withholding, federal and state, and penalty avoidance. Self-employed multiple jobs workers can reap important benefits from our expert tax advice when filing your tax return!
TFX's editorial team of experienced writers, editors, and financial experts produce rigorously fact-checked articles on the latest business tax news, ensuring high editorial standards and content integrity. See more
