New College Graduate With a New Job? Here’s a Tip to Save on Your Taxes

Tax Savings Tip for New College Graduates

New Grad With a New Job? Here’s a Tax Planning and Savings Tip for New College Graduates

by Randy Newton

Here’s a tax planning and savings tip for new college graduates fresh out of school that might help you save on your taxes.

Are you a recent college graduate who was fortunate enough to land a new full-time job? Congratulations! It’s an exciting time when you start your career and enter a new phase of life– there are so many new things to learn. One of those things, now that you’re employed, is the sometimes-confusing world of income taxes and the tax planning you need to do to save on taxes.

What Is Income Tax Withholding and How Is It Calculated?

If you are a regular W-2 employee (not an independent contractor), your employer is required to withhold money from every paycheck to cover your taxes. (The funds withheld from your check are submitted to the IRS each quarter.) Each year when you file your tax return in April, if the funds withheld exceed the amount of taxes you owe, the IRS returns the extra money to you– that’s your tax refund.

Every year, the IRS releases new standard federal tax withholding tables, which specify how much employers are required to withhold for their employees. The amount withheld from your paycheck is calculated using those tables, based on the number of exemptions you claimed on the W-4 form you filled out when you were hired.

The Problem With Standard Withholding for Recent Grads

Here’s the problem: The standard federal tax withholding tables assume you are working full-time for the entire year when figuring out how much income tax to withhold from your paycheck. But if you just graduated in May or June, you were in school for part of the year, so you might actually end up with more money being withheld than you need.

For many people, that’s fine– you will get those funds back when you file your tax return, so it’s only a matter of time.

But what if you need more money now? Many recent graduates who are juggling student loan repayment and the costs of living on their own on an entry-level salary need all the help they can get!

One Option You May Not Have Heard of: Part-Year Withholding

If you will be working fewer than 245 days this year in total, there is an option for you to consider that will help you increase your take-home pay: Part-year withholding.

Part-year withholding uses a different method for calculating the taxes that need to be withheld from your paycheck; instead of being based on a full year of full-time employment, the part-year method is based on what you will actually earn during the portion of the year that you work.

To be eligible for the part-year method, you must meet both of the following requirements:

  • You must use the calendar year (the 12 months from January 1 through December 31) as your tax year. You cannot use a fiscal year.
  • You must not expect to be employed for more than 245 days during the year. To figure this limit, count all calendar days that you are employed (including weekends, vacations, and sick days) beginning with the first day you are on the job for pay and ending with your last day of work. If you are temporarily laid off for 30 days or less, count those days too. If you are laid off for more than 30 days, do not count those days.

Note: You will not meet this requirement if you begin working before May 1 and expect to work for the rest of the year.

How to Apply for the Part-Year Method

To ask your employer to use this method, you need to submit a request in writing  with the following information:

  • The date of your last day of work for any prior employer during the current calendar year
  • That you do not expect to be employed more than 245 days during the current calendar year
  • That you use the calendar year as your tax year

If you don’t ask, your employer will use the full-year method, so you will have to wait until you file your tax return to get the excess back.

You can read the IRS guidance about the part-year method here (the relevant section is about halfway down the page). If you have any questions, check first with your employer; they should be familiar with part-year withholding and may have a form for you to complete to make this request.

And if you either don’t qualify for the part-year method or forget to ask, don’t worry– you will get back any excess funds withheld, you just have to wait until you receive your refund after you file your tax return.

Hope this tax savings tip for new college graduates helps!

Randy Newton is a Charlotte CPA and Tax Planning Specialist. You can read more of Randy’s posts about tax news and developments here and on the Lodestar Tax & Accounting website.

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