Congratulations to the Class of 2020! Graduating from school can mark an exciting time for new graduates as they transition from being a student to becoming a working professional. This three part series will dive into some helpful information and tips on what to expect as you journey down your career path.
Understanding Your Tax Liability
It’s the first day on the job and your new employer gives you a pile of paperwork to fill out to become an official employee . Part of their requirement is to provide you with a Form W-4, Employee’s Withholding Allowance Certificate, so they can withhold the correct amount of federal taxes from your paycheck. How you fill out Form W-4 determines how much of your wages your employer will send to the Internal Revenue Service (IRS) to be applied towards your tax liability when it comes time to file your tax return in April. The amount of withholdings will be based on your marital status and any adjustments you claim on this form so consider your circumstances prior to filling Form W-4.
When it comes time to file your tax return, if your actual tax liability is lower than the amount the IRS has on account for you, then you will receive a refund of the difference, but if your actual tax liability is higher than the amount the IRS has on account for you, then you will need to pay the difference at the time of filing. Most people will go through changes during their career, so consider completing a new Form W-4 when you experience changes to your personal or financial situation.
Employee benefits are among the many perks employers will offer to help them recruit and retain their employees. Among the common employee benefits are health savings accounts (HSA) and flexible spending accounts (FSA) which can help you cover qualified medical expenses with tax-free dollars.
When covered by a high-deductible health plan (HDHP), individuals can help cut costs by participating in a health savings account (HSA). HSA plans allow individuals to pay for qualified unreimbursed medical expenses with tax-free dollars. While HSAs can be open individually, some employers will make contributions to an HSA on behalf of their employees, but even if your employer doesn’t make contributions on your behalf, your contributions can help reduce your taxable income at the time of filing your tax return. Keep in mind that to be eligible for a HSA, you need to be covered by a HDHP and have no other health coverage, such as Medicare, military health benefits, or medical FSAs and you cannot be claimed as a dependent on another person’s tax return. Also, unlike flexible spending accounts, the entire HSA balance rolls over from year to year and earnings from interest and other earnings on the assets are tax-free.
Some employers will offer a flexible spending account (FSA) as a benefit to their employees, and some will even make contributions to these accounts on your behalf, although they are not required to. Unlike the HSA, FSAs set aside funds for certain out-of-pocket health care costs before taxes so it will reduce the amount of taxable income reported on your W-2. Your employer may also offer a Dependent Care FSA (DCFSA) which can be used to pay for eligible dependent care services, such as preschool, summer day camp, before or after school programs, and child or adult daycare with pre-tax dollars.
Another key difference between the FSA and HSA, is that FSAs generally need to be used within the plan year, however, employers can offer a grace period to use the money or a carryover of $500 into the following year. Keep in mind that employers are not required to offer the grace period or carryover amount so discuss the plan details with your employer prior to participating in these plans. At the end of the plan year or grace period, any money left remaining in these accounts will be lost so it’s important to plan carefully and to not put more money in your FSA than you expect to spend on things like copayments and other qualified costs.
It’s smart to start socking money away for your retirement early and these days many employers do offer a retirement plan as an employee benefit. Many students are also faced with student loan repayments and a slew of additional post-graduation expenses so saving for retirement may not be on the top of their priority list. However, participating in a retirement plan is not only a good way to save for retirement but it can also provide you with tax savings if you participate in a 401(k) or 403(b) retirement plan. Your contributions to these type of accounts will reduce your taxable income which could mean more money in your pocket when it comes time to file your tax return.
In addition, some employers will offer an employer match, which is the amount your employer will contribute to your retirement account for your benefit. Employer contributions are typically based on a percentage of the participant’s annual contribution but every plan can differ so ask your employer about the details of the plan before participating. Keep in mind that most employer matches will be based on your contributions to the plan so if you fail to contribute you could potentially be losing out on free money. Also, while the contribution limit for 401(k) and 403(b) plans is $19,500 for the 2020 tax year, there is no minimum you can contribute.
Things to Consider
Now is the time that new graduates will take their degrees and venture into the working world. As you are navigating through the changes that joining the work force may bring, armed with the valuable information of what you can expect from your employer will help you gain long-term success in your career.
As always, our CPAs at Mason + Rich are ready to answer any additional questions. Feel free to call us at 603-224-2000.
Also check out Part II and Part III from 2019: