Special Payroll Tax Scenarios

If you didn’t read my post on Payroll Tax 101, start there.

If you did, then you already know that you don’t have to worry about adjusting for underpaying or overpaying payroll tax when it comes to your tax return. That is because employers are required to calculate the exact amount you owe, and they pay it straight from your paycheck.

However, some employment situations can complicate the calculation of payroll tax. Common examples 👇:

Married Couples

Married couples filing jointly may find that they owe additional Medicare tax, at year end. For example, if you and your spouse each earn $150,000, your respective employers will withhold the regular 1.45% for Medicare tax. However, your combined income is $300,000, which is  $50,000 above the threshold for married couples filing jointly. Consequently, you will owe an additional $450 (0.9% of $50,000) when you file your taxes.

Job Changers

If you changed jobs this year, your new employer is not going to know how much Social Security you’ve already paid. Hence you may end up paying Social Security tax over and above the maximum amount. Employers are required to withhold the tax from you, so an adjustment can’t be made during the year to withhold less. But worry not, the IRS will refund the overpayment as long as you file your tax return correctly.

Self-Employed Individuals

If you work for yourself, you are responsible for the entire 15.3% of payroll tax — both the employee component and the employer share — since they are, in effect, both employee and employer. Self-employed are generally required to pay estimated quarterly tax payments to cover payroll tax. I highly recommend working with a tax professional to get this done right. Otherwise you may not only face a steep tax at year-end, but penalties as well.

Side-Hustlers

A side hustle can push your combined income above the higher Medicare tax threshold — causing you to owe more Medicare tax than your primary employer withheld.

On the flip side, once your wage income is above the Social Security wage base, having a side gig offers an extra benefit: None of that extra cash will be subject to the Social Security tax. If your second job produces another W-2 wage, you may find that your employers are withholding too much for Social Security between them. Just like if too much tax was withheld due to a job change, the IRS will refund the overpayment as long as you file your tax return correctly.

If you want to learn about ways to avoid the payroll tax, check out my post here.