Does everybody (working) have to pay taxes? (CPAs & employers help!)

[Trashman]

Hi folks, here's the story:

As far as I've always known, everybody has to pay taxes (federal income tax). I've always heard that even if you only make a hundred dollars a year, you still have to claim it and pay taxes on it (though, you'll probably get it back). I've always had taxes taken out of my checks automatically, regardless of how much I made.

So, a few months ago, the old owners of my work (Conroy's) sold the shop and the new owners have taken over. The old owners used ADP (a large payroll company) to professionally handle the payroll. The new owners do it themselves. Just recently, I noticed that federal income tax hadn't been taken out of my check. I pointed this out to my new boss and he contacted his CPA (who, I guess, takes care of the payroll for this and their other business). His CPA told him that I'm not making enough money for him to take taxes out. In other words, I'm not making enough to where I have to pay federal income tax. This doesn't sound right to me. I mentioned this to my old boss (today, actually) and he says it doesn't matter how much a person makes--everybody has to pay federal income tax (though, of course, some people get it all back (or most of it).) Yep, he told me my new boss's CPA doesn't know what he's talking about.

Are there any CPAs or employers that can tell me the real story? Does my low salary actually exempt me from having to pay federal income tax? Even if I don't pay in the end, isn't it normal for me to have to pay throughout the year? It sounds like a crock to me and I don't want to get stuck at the end of the year owing any dough. Please help.

PS. The other taxes are taken out...social security, workers comp, and state.

 

[TigerhawkT3]

While I was an intern, I made about half of your reported weekly rate, and I paid taxes. I don't remember whether it was Federal or State taxes that was refunded, but in the end, the TurboTax fee was more than my taxes.

So yeah, you'll always pay taxes, even though it may be refunded later.

 

[LuxLuthor]

Depending on number of allowances you have, then subtracting that amount from your income, if you now have a small income, there is no federal withholding due. Look at this Purdue Edu example website.

For example, you have 4 allowances, are married, and make $800 biweekly. Subtract $523 for 4 allowances from $800, and you are under the $308 remaining income which results in no federal deductions.

 

[jtr1962]

If you make less than about $8500 (single) or $17000 (married-both incomes combined) you won't have any federal tax liability, so you don't need to have any taxes except Social Security withheld. These numbers both increase if you have dependents, your itemized deductions exceed your standard deduction, or you're opening a non-Roth IRA that year. Also, if you make so little that your total tax liability for the year won't exceed $1000 you can also opt not to have any taxes withheld (just increase the number of exemptions on your W4). You'll just end up paying what you owe for the entire year when you file your taxes. Just be careful though. You don't want to owe the IRS more than $1000 come tax time or you may be stuck paying penalties. The best situation is to have enough withheld so you either break even or owe them a few hundred come tax time. You *don't* want to get large refunds because in effect those constitute a tax free loan to the government.

Anyway, your old boss is wrong. If you have little or no tax liability for the year you don't have to have any federal taxes withheld. Also, it's better to owe a little than to get a refund. So people use excess withholding as a sort of forced savings plan. Bad idea. If a person really lacks the discipline to save then just have x amount taken out of each paycheck automatically and put into an IRA. If it's a non-Roth IRA, you'll even get up to another $4000 off your taxable income.