Taxes and Your First Job

When you get your first job, it may be surprising – and disappointing – just how much tax you must pay before you get what’s left over. 

For starters, Uncle Sam dips into your pay for income tax, Social Security tax, and Medicare tax. Depending on where you live, you can also count on state and maybe even local taxes being deducted. What started out at a reasonable figure (we hope) has been somewhat … diminished, hasn’t it? 

Here’s how this withholding business works: 

A Matter of Withholding 

Before you begin your new job, you’ll be asked to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Your employer uses this form to figure how much in federal taxes are to be withheld. Use the IRS’ Withholding Calculator to get a better idea on how to complete this form. There’s also a worksheet on the form that can help you work out what’s best in your situation. 

If you live in a state that has income tax — most do — you’ll also have to fill out a similar form for withholding state income taxes. 

Side note for the self-employed: You’ll have to hold out taxes for yourself from the payments you get from clients and send them in regularly – or be prepared to pay up when you file your income taxes at the end of the year. We don’t recommend the latter: it’s likely to get you slapped with a penalty for not paying your tax all along. Pay-as-you-go is best. 

Other Withholding 

Having your first full-time job probably also means you’ll need to make some decisions on benefits for the first time. Depending on the size of the company that employs you, there could be choices on retirement, health insurance, and other items that you may not have faced before. So here are a few guidelines. 

Retirement: Since this is your first full-time job, saving for retirement is probably not on your radar right now, but it should be. The earlier you start saving for retirement, the more you'll have when it's time to use that money. If your employer offers a 401k plan, enroll as soon as you’re eligible. Even if you don’t think you can afford the entire allowable withholding amount, contribute enough to qualify for the employer match. 

Health Insurance: If your employer offers a health insurance plan, take part in it. Many times, the company will pay some – or even all – of the premium amounts. But even if you must pay the entire premium, it’s still worth the expense. 

Some employers also offer flexible spending accounts as part of their healthcare package. These allow you to put money aside for medical expenses, such as deductibles. Most accounts do not roll funds over from one year to the next, so you have to use it or lose it by the end of the year. 

Other Benefits: These other benefits can include term life insurance, disability insurance, even pet insurance. There’s lots of variety in this area, and lots of other ways withholding can show up on your paycheck. 

Summer Jobs 

You may not earn enough from your summer job to owe income tax. If that’s clear when you’re filling out Form W-4, you may be exempt from federal income tax withholding – but you still must fill out the form. If you’re working for someone else, your employer will usually still have to withhold Social Security and Medicare taxes from your pay. (If you’re self-employed, you have to pay those taxes yourself.) 

Even if you didn’t earn enough money to file a return, you may want to anyway. If your employer withheld income tax from your pay, you’ll have to file a return to get those withholdings refunded.