How to avoid owing tax and get a refund instead
Q: I work two jobs and I always owe tax at the end of the year. I feel like I’m getting punished for hard work. How do I make it so I get a refund instead of owing tax each year?
A: That is a terrible situation to find yourself in! Fortunately there’s a solution.
A tax bill is triggered whenever you owe more tax on your income than has been withheld for you. This is a common occurrence with people who have two jobs, just because of the way employers tend to calculate the amount to withhold.
To work around this, you need to have a little more held back from each paycheque.
How much? It’s actually super easy to figure out: start with the amount of the tax bill that you would like to wipe out. Next, pick one of your employers and see how many times per year you get paid.
Divide the first number by the second number and that gives you the amount of extra tax you should have your employer withhold on each cheque.
amount to withhold =
[tax bill] / [pay periods in the year]
For example: say you got a $2,600 tax bill last year that you’d like to wipe out. And say you get paid every two weeks, i.e., 26 times per year.
[tax bill] = $2,600
[pay periods in the year] = 26
Therefore the amount to withhold = $100 per paycheque [=$2,600/26]
But here’s where it gets really fun. You can decide to wipe out the tax bill AND trigger a refund!
Just as a tax bill is the result of setting aside too little tax, a tax refund is just the result of setting aside a little too much. So you could pick an amount to withhold according to this calculation:
[tax bill + desired refund] / [pay periods in the year]
For example: say you got a tax bill of $2,600 and want an additional $1,000 refund. And say you’re still getting paid 26 times per year.
[tax bill + desired refund] = $2,600 + $1,000 = $3,600
The amount to withhold on each paycheque would be $138.46 [= $3,600/26].
This amazing tool also works great as a way to save for something important. You can use the same calculation, and set your ‘refund’ amount equal to whatever you want: retirement savings, debt repayment, or for a major purchase. (Why not all three?)
If your employer can’t or won’t withhold the extra tax for you, remember that you can also do a version of this yourself: just set aside the required amount, e.g., in a separate bank account or even a piggy bank, every time you get paid. At the end of the year, you’ll have enough money to pay your bill and get the ‘refund’ you want.
Learning how to do this for yourself can be powerful and fun. Plus, you’ll be the only person you know who enjoys tax time!