tax question

[eLiu]

Hi all,
From 1 Jan to 31 Aug of this year, I was paid by a fellowship program; it expired at the end of August. They did not do withholding, so I have been using form 1040-ES to pay estimated taxes each year (so for all of last year & 3/4 of this year, I have had $0 withheld and have paid quarterly tax).

I'm starting a job in Jan 2013 (roughly). Until then, I will be working part-time for the same company. I arranged to receive my signing bonus immediately and I will also be receiving pay from the part-time position.

Right now, I need to fill out form W-4. What I want to know is:
Can I ask them to withhold NOTHING?
How do I ask them to withhold nothing? (99% sure I don't qualify for exempt status.)

Using 1040-ES, I have been (and will be) paying quarterly tax that equals my *total* tax liability from 2011, call that $X. This year, counting part-time & signing bonus, I'll make $X+Y. Since I'll have already paid $X, my understanding is that I can pay the tax liability for $Y when I fill out Form 1040 next April.

Thus, I want NOTHING withheld on my paychecks from my new employer for this year. When I start full-time, I'll fill out a new W-4 and withhold the proper amount.


If that is not possible, how is the actual amt withheld computed? Is it based on what I would make if I worked for a whole year at the same pay? (Even though I'm starting 3/4 of the way through the year?)


TL;DR:
I want my new employer to withhold NOTHING for taxes. How can I do this?

Thanks!

 

[jagec]

If you don't quality for exempt status, you can't have zero withholding. Since you paid taxes last year, you don't quality for exempt status.

But you wouldn't want to anyway, since if you end up owing more than $1000 on $Y, you'll have to pay penalties and interest when you file your 1040.

The withholding amount should be proportional, so if you're paid biweekly (say), they'll withhold 1/27th of your estimated tax liability on each paycheck.

 

[CPA]

First off, the signing bonus will have 25% withheld as the IRS considers bonuses supplementary compensation. So, you will have to have that withheld in most cases.

If you want to know what will be withheld for federal on your normal wages, use the tables from Publications 15 to get a good idea. Start at page 38. Make sure you are using the proper table for your filing status and pay frequency.

Oh, and no matter how much you have withheld, you will still have FICA withheld.

 

[eLiu]

If you don't quality for exempt status, you can't have zero withholding. Since you paid taxes last year, you don't quality for exempt status.

Do you know where the precise language is? The stuff I'm seeing online talks about if you were/will be refunded all taxes *withheld* this year & last year. I had 0 taxes withheld last year and I'd like to have 0 taxes withheld this year. So technically I will be refunded everything that was withheld...

But you wouldn't want to anyway, since if you end up owing more than $1000 on $Y, you'll have to pay penalties and interest when you file your 1040.

No. You are exempt from that penalty if at least 1 of 2 things are true. This one applies to me:
"The total of lines 62, 63, and 69 on your 2011 return is at least 100% of the tax shown on your 2010 return..." (i made way less than 150k so the 110% doesn't apply either)
I will have paid 100% of my 2010 tax thru estimated tax (line 63). So no penalty will apply.

The withholding amount should be proportional, so if you're paid biweekly (say), they'll withhold 1/27th of your estimated tax liability on each paycheck.

That would be the WORST possible scenario. I'll be making like 4x as much as I did when I was a graduate student; if they withhold based on that annual income, it'll be way over the correct amount.

The IRS's W-4 calculator doodad was telling me to claim 23 allowances. Lawl. That also seems balls since any forms claiming more than 9 allowances have to be reviewed by the IRS.

 

[eLiu]

First off, the signing bonus will have 25% withheld as the IRS considers bonuses supplementary compensation. So, you will have to have that withheld in most cases.

If you want to know what will be withheld for federal on your normal wages, use the tables from Publications 15 to get a good idea. Start at page 38. Make sure you are using the proper table for your filing status and pay frequency.

Oh, and no matter how much you have withheld, you will still have FICA withheld.

The bonus is considered income (this has been verified w/several parties b/c I thought it was weird too). It is earned over the course of the first year insofar as if I quit before the first year is up, I have to pay it back (pro-rated). So the 25% won't apply. (This was a motivating factor for getting it paid this year since my income as a grad student is diddly squat by comparison.)

Yeah I'm fine with social security/medicare/whatever being withheld. Obviously I'm not trying to break the law. I was assuming that having 0 withheld on W-4 does not exempt you from payroll stuff.

But yes, from those tables, the withholding will be WAY too high. After two pay periods, I will have paid more taxes than I did in all of last year! (B/c the tables are figured as if I were drawing that income for a *full year* which I am not). And according to the penalty language on Form 1040 Instructions, there are 0 drawbacks to paying everything in excess of my 2011 liability on April 15th. Unless I'm misunderstanding...

The IRS calculator wasn't kidding; I would need to ask for 20+ allowances to make it balance out for me. Still, I would rather pay everything in excess of my 2010 tax on tax day instead of letting money sit w/the gov't.

 

[EagleKeeper]

You have no control over bonus payment taxes. 25% off the top;

File in Feb and have the $$ back.

IF you wish to have the minimal amount possible on what is withheld; increase the W4 to what ever number you desire up to 99
Realize that when you get into double digits; it gets the IRS's attention.

 

[eLiu]

You have no control over bonus payment taxes. 25% off the top;

File in Feb and have the $$ back.

IF you wish to have the minimal amount possible on what is withheld; increase the W4 to what ever number you desire up to 99
Realize that when you get into double digits; it gets the IRS's attention.

I will ask HR what the tax status of the bonus is. My friend swears it was regular income for him but HR will know for sure.

And yeah, I know asking for > 9 allowances requires some kind of extra interaction with the IRS. I'm asking HR what the deal there is.

I don't want to get the $$ back next year, I want to never pay unowed taxes in the first place. I refuse to believe that the system is set up to force people to overpay. Besides, I want to take a nice vacation before I start full-time (last real chance to take like 3-4 weeks and do whatever the hell I want), and I'd much prefer to do that with my bonus rather than have to sell stocks to fund it.

 

[CountZero]

I will ask HR what the tax status of the bonus is. My friend swears it was regular income for him but HR will know for sure.

And yeah, I know asking for > 9 allowances requires some kind of extra interaction with the IRS. I'm asking HR what the deal there is.

I don't want to get the $$ back next year, I want to never pay unowed taxes in the first place. I refuse to believe that the system is set up to force people to overpay. Besides, I want to take a nice vacation before I start full-time (last real chance to take like 3-4 weeks and do whatever the hell I want), and I'd much prefer to do that with my bonus rather than have to sell stocks to fund it.

The system is set up to force people to overpay because it is far easier to get people to file to get money back than it is to get people to pay.

Every bonus I have ever received has been taxed at a crazy rate when I received it and shown up as regular income at the end of the year. It means even when I carefully control my exemptions I've always overpaid thanks to bonuses.

Unless you want to pay for professional advice I'd say take the most exemptions you can without getting noticed by IRS and suck it up otherwise because playing games with the IRS is a losing proposition.

 

[eLiu]

The system is set up to force people to overpay because it is far easier to get people to file to get money back than it is to get people to pay.

Every bonus I have ever received has been taxed at a crazy rate when I received it and shown up as regular income at the end of the year. It means even when I carefully control my exemptions I've always overpaid thanks to bonuses.

Unless you want to pay for professional advice I'd say take the most exemptions you can without getting noticed by IRS and suck it up otherwise because playing games with the IRS is a losing proposition.

Eh... I fully intend to write down 30 allowances. Sorry, overpaying my tax liability by a factor of 2 is not acceptable, ever.

But thanks for the clarification on bonuses. I had assumed that if something is taxed as regular income at the end of the year, it would be consistently treated as regular income throughout the process. I guess consistency is too much to ask for from our tax system.