High withholding rates mean you could end up with a huge tax refund next year. Here’s why and how to keep more of your money now.
Going through your first paycheck and trying to figure out what every deduction even means is depressing. Depending on how much you make and where you work, as much as 20% or 25% may be withheld from your paycheck for income tax. Luckily, it’s not likely that you will end up actually paying that amount.
Let’s go over how interns are taxed and why you might be able to look forward to buying a nice big screen TV in April next year.
How are interns taxed?
Interns are taxed in two ways:
- FICA taxes, which include Social Security and Medicare payments.
- Federal and state income taxes.
FICA taxes rates will likely be the same for all interns, but income tax rates are based on the amount you make.
The U.S. has a progressive tax system, which means the more you make, the higher your tax rate. Here is the 2022 tax bracket for single filers:
|Tax Rate||Income Level||Tax owed|
|10%||$0||10% of taxable income|
|12%||$9,951||$995 plus 12% of any amount over $9,950|
|22%||$40,526||$4,664 plus 22% of any amount over $40,525|
|24%||$86,376||$14,751 plus 24% of any amount over $86,375|
|32%||$164,926||$33,603 plus 32% of any amount over $164,925|
|35%||$209,426||$47,843 plus 35% of any amount over $209,425|
|37%||$523,601||$157,804.25 plus 37% of any amount over $523,600|
Let’s say you did end up making $165,000 (after all deductions to make it simple), you tax would be:
Note that 1099 employees, or independent contractors, often don’t have taxes withheld from their paychecks. If you are a 1099 employee, you’ll be responsible for making quarterly tax payments. Make sure you keep track of all work-related deductions and keep receipts because 1099 contractors can deduct these expenses.
When does an internship lead to large tax refunds?
Internships will lead to a large tax refund when your withholding rate is more than your effective rate. Let’s say you work for three months over the summer and make $8,000 per month. That’s right around $1,850 per week.
The IRS table says your weekly withholding amount should be $268. Over 13 weeks of work, you pay $3,484 to the IRS. But what do you really owe?
Assuming you don’t work (for a paycheck) for the rest of the year, you’ll end up earning $24,000 on the year. That means your tax is:
If you have the most vanilla tax return in history, and someone else reports you as a dependent, you’d get a return of $803 ($3,484 – $2,681). Once you start adding things like deductions, education credits, and donations, your return will start getting bigger and bigger.
Can’t I just withhold less in each paycheck?
Good question. It’s nice to get a big refund until you realize that means you gave the IRS an interest-free loan. Use the IRS’s tax withholding estimator to determine what your ideal withholding is. You can enter in all your relevant info and choose what amount you want your return to be (or not to be) and there will be a link to a new W-2 form correctly filled out at the end.
Withhold on for one more day
Starting your first high-paying job is stressful, and one of the things that can fall through the cracks is withholding amounts. If you don’t mind getting a refund, leaving the standard withholding is fine, but being proactive and setting your amount ahead of time will let you keep more of your pay now.