Saving for Taxes in Your First Job
A guide to tax planning so you can enjoy your first payday.
Few experiences are as memorable as your first job: Your first taste of freedom. Your first real-world responsibility. And, of course, your first paycheck. But that first paycheck also comes with questions that aren’t simple to answer. Questions like, how much do I pay in taxes?
The tax question is especially hard for contractors, and these days, more and more people are taking on flexible freelance work. That can make understanding taxes, and figuring out how to do taxes, more complicated.
But don’t worry. Navigating your first tax season doesn’t have to be stressful. What to wear on your first day? That’s up to you.
What kind of worker are you?
A hard worker, no doubt. But when it comes to taxes, you’ll need to know whether you’re an employee or independent contractor.
The IRS defines an employee as someone whose work is controlled by the employer,1 determining when, where and how you do your job. The company also provides you with most of the tools you need to do your work. This describes most American jobs, including most part-time ones.
In these jobs, the employer typically withholds money from every paycheck to be sent to the IRS. That leaves the employee with less to worry about come tax season.
But many workers are classified as independent contractors, including freelance writers, most laborers and other workers from across the economic landscape. As a contractor, you have more control over when and how you work. But you also have to set your own schedule, find your own health insurance and buy many of your own supplies. Perhaps most important, you have to set aside money to pay your income taxes.
What if I'm a W-2 employee?
However your paychecks come, it’s important to have a plan for what to do with the money. If you’re a traditional employee, you probably don’t need to set aside much money for taxes. Your employer will do that for you, and every pay stub should show you exactly how much money you paid to the IRS. At the end of the year, you’ll receive a W-2 showing what you’ve earned and what you’ve paid the government.
Regardless, you may want to consider opening a savings account for financial emergencies or long-term goals, like buying a new car or paying down student loans. If you use direct deposit, you might also ask your employers if they can deposit part of your paycheck to your checking account and part to your savings account. That way you don’t have to manually transfer money to your account every month—it just happens. At some banks, you can also choose specific settings to help fund your savings account, like an automatic $50 transfer every week.
What if I’m a contractor?
For independent contractors, a savings account can be even more crucial. With no taxes being withheld from your paycheck, it’s your job to save some of your income to pay income taxes. Rather than a W-2, contractors receive a 1099 form, which simply summarizes how much income they received. It’s the 1099 worker’s responsibility to determine what they owe in taxes and when.
Something else to keep in mind is that for many contractors, tax season comes 4 times a year. The IRS expects you to pay prospective taxes throughout the year. To avoid penalties, it can be a good strategy to save as you go and pay an amount every quarter. Thankfully the IRS’s estimated tax guide can help answer these questions, as can a tax adviser.
How to save on taxes
Paying taxes isn’t the best part of your first job, but there are plenty of ways to save on your first tax bill.
For W-2 employees, those benefits often come directly from the employer, including retirement plans and health savings plans that are funded with pre-tax income. Other deductions are up to you to find and take, like deducting the amount of interest you pay on student loans.2 They all help reduce how much tax you owe.
For 1099 workers, there are even more opportunities to save. Business expenses like mileage, office supplies, even your cell phone or internet bill may be deductible, lowering the amount of income that you’ll have to pay taxes on. Consider consulting an accountant or the IRS website to determine whether an expense is deductible.3
What if I get a tax refund?
If you plan well and pay your taxes regularly—either through your employer or directly as a contractor— you might just find that you paid more than your share. In that case, you’ll get a tax refund. If so, try to reward yourself, perhaps with a fun night out among good friends. But also consider planting some of that refund in your savings account. Along with tax planning and investing, a simple savings strategy can help lay the foundation for financial peace of mind.
Like your first date, your first solo drive or your first night in a college dorm, your first paycheck is a thrill. And with a little planning, you can make sure that thrill isn’t muted by tax-induced stress.
This site is for educational purposes. The material provided on this site is not intended to provide legal, investment, or financial advice or to indicate the availability or suitability of any Capital One product or service to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional.
IRS Self-Employment Center (December 14 2017). Retrieved December 21, 2017, from:https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center
Student Loan Deductions, IRS (January 3, 2018). Retrieved January 5, 2018, from:https://www.irs.gov/taxtopics/tc456
IRS Deductible Business Expenses (November 14, 2017). Retrieved on December 21, 2017, from: https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses