Do you have a part-time job in addition to your full-time job? Or maybe you do some ride-sharing on the-side, such as with Uber or Doordash – or other similarly-structured ‘side-hustles’? Are you filing your taxes soon? Then read on!
Received a W2 from a Part Time Job and my refund decreased. What is going on?
First, the fact of the matter is this: You will be paying taxes on your earned wages, regardless of your job. While most part-time jobs offer the opportunity to change the amount you withhold on your W-2, it may not always be obvious. Conversely, most ride-share services do not offer a W-2 form, which can lead to some confusion come tax-time. Let’s take a look at the two situations in more detail:
You have a full-time job and a part-time job and when you go to file your taxes, you notice that you owe money after entering your part-time job’s W2, but you had a refund when it was just your full-time job W2. What gives?
The answer to this can be found with your W2 forms.
Take a look at your W2 for both jobs, and take ‘Box 2’ and divide it by ‘Box 1’ in order to get your federal withholding rate for each job. For example, let’s say you earn $35,000 in wages, tips and other compensation (Box 1). Of those wages, let’s say $5,000 is federal income tax withheld (Box 2). Thus, if we divide $5,000 by $35,000, we get a withholding rate of 0.14 (or 14%).
Typically, with a full-time job, the withholding rate will be around 10-15%, which if large enough, will mean you’ve covered the taxation amount you owe the IRS and will typically see a refund from the Federal government upon filing your taxes. However, for a part-time job, it can be much lower (or potentially zero!). Let’s say you’re not withholding anything in your part-time job. Since you are taxed on total income (full-time job + part-time job), the part-time job isn’t withholding enough to cover the higher tax rate included with your overall wages accounted for in your W2, meaning your federal refund will be lower – or you’ll owe money back.
How do I fix it?
This can be looked at as the government loaning you money throughout the year at 0% interest rate, which is great, as long as you know money will be owed at the end of the year. You still pay the same amount of tax on your wages, it just depends if it is done all at once or ‘bit-by-bit’ with each paycheck received.
To avoid this, you can adjust your withholdings for the 2021 (and future) fiscal years to help keep away surprises. The IRS has an easy-to-use tool that can be tweaked to project your refund based on your income. You can even print a copy out to give to your employer to adjust the amount withheld on your paychecks. https://www.irs.gov/individuals/tax-withholding-estimator
I have a part-time job as an Uber driver, Grubhub, Doordash, Lyft, etc. How do my taxes work with this ‘gig’?
Unlike a full-time or part-time job where you are employed directly with a company, if you work for a ride-share company, you are employed as an independent contractor for them and won’t be offered a W2 form. Two important notes about this: 1) this means the company won’t withhold taxes from your paychecks and 2) in the eyes of the IRS, you are deemed a small business owner or the owner of your rideshare business. What do these two things mean when it comes time for taxes? Chiefly, that you’ll owe money come tax time on for both your income tax as well as self-employment tax (FICA; which consists of Medicare and Social Security). When you work a W2 job, your employer withholds 7.65% for Social Security and Medicare. Your employer also pays the same 7.65% on your earned wages. The self-employment tax makes you pay both sides of this tax and clocks in at 15.3% on top of your income tax rate.
There are one of two (or both) tax forms that correlate to being self employed that are available to ride share drivers at tax time, a 1099-K or a 1099-NEC (formerly 1099-MISC) tax form. A 1099-K is an official IRS tax document that includes a breakdown of annual on-trip earnings, which you will receive from most ride-share companies if you earned more than $20,000 in customer payments or provided 200 rides in a year (these numbers can vary by state). A 1099-NEC is also an official IRS tax document that includes breakdown on annual on-trip earnings, for individuals who received more than $600 in customer payments. When you enter these forms, your software will tell you that you owe taxes. This comes as a surprise for some people. The good side of receiving a 1099 is you are allowed to deduct certain expenses attributed to that income.
Firstly, track your expenses. These taxes are based on your profit after your expenses. This is where tracking those expenses pays off. If you are in a 10% tax bracket, for every $100 of deductible expenses you reduce your tax liability by $25 ($100 X (10% Income Tax + 15.3% SE Tax)). Keeping accurate data on total miles driven, rideshare related miles, tolls, parking and fuel can be used towards write-offs in your taxes. You spent the money, make sure you track it so you can claim the deduction. It’s also good business to keep this information up-to-date and on-hand. There are plenty of apps out there to keep you organized. Secondly, you can pay estimated taxes as you go throughout the year, instead of in one lump-sum at the end of the year. These payments are made on 4/15, 6/15, 9/15 and 1/15 of the next year and can be paid directly to the IRS through their website (among a variety of options). If you don’t make timely estimated payments, you could be subject to penalties and interest. Don’t forget to pay your state and local estimated taxes as well!
I Still Need Help!
Still confused? We get it, like most tax issues, it’s complicated and everyone’s situation is different. Be sure to contact a tax professional like us at My Numbers Guy to help set you up the right way.
We hope this helps clarify some commonly asked questions about taxes in regards to these two situations! As always, thanks for letting My Numbers Guy be YOUR Numbers Guy!
Information adapted from: