Someone once said the only two certainties in life are death and taxes. For some of you this will be your first experience with the Tax System. For others, you may already be seasoned veterans at paying for our roads, armies, and air traffic controllers. You should try to look at it this way: "Taxes are like a ‘Co-Op Work Experience Fee’ that NEVER goes away!" The trick is to minimize your share under the rules allowed by the law.
This essay is intended as a general introduction to employment taxation. Everyone’s specific situation is different. You should consult a professional tax advisor, if you have questions! This essay will discuss Emancipation, Residency, Federal Income Tax, Payroll Taxes, State Taxes, and County Taxes.
EMANCIPATION: Are you on your own, or still part of your parent’s household?
In essence, the issue here boils down to: Are your parents’ claiming you as a dependent on their tax forms? For nearly all Co-Ops, you and your parents are both better off declaring you to be independent. Obviously, it would be possible to create a scenario in which this is not the case, but it would be very unlikely that it would apply to many people. The way our Federal Tax System is structured for reporting is based upon family units. Personal deductions to Gross Family Income are calculated by the number of individuals in the family unit. If your parents claim you as a deduction, you are NOT emancipated. They will have their taxable income reduced some by the personal deduction for you as an individual. However, they will also need to add your Co-Op income into the Gross Family Income. The net result most probably will be more income taxes paid to the Federal Government by you and your parents.
On the other hand, if you declare yourself to be independent, you file your own return. Your parents can no longer claim you as a deduction, but you will be taxed at a lower rate, since your Gross Family Income is smaller. You will also receive a ‘Wage Earner’s’ deduction that you cannot claim as a dependent on your parents’ return. To become emancipated, you merely have to file your own returns. You must discuss this issue with your parents though, because the returns must be consistent. You cannot be a dependent on their return and file your own! As a bonus for emancipation, most collegiate financial aid paperwork becomes simpler, since you don’t have to ask your parents for materials to complete the forms.
RESIDENCY: Where do you live?
Unfortunately, this is not as simple as it seems. You reside where you live, but as a college student, you may live one place on campus and retain permanent residency at your parents’ home elsewhere. (You can be emancipated and still claim your parents’ home as your permanent residence.) For Co-Op students, this issue becomes more clouded and complex, since you move frequently between a job site and campus. As a general rule, you will not want to use your work address as a permanent address. Typically, you will use either your campus address or your parents’ address. There are two critical issues here: State Taxes and College Tuition. You need to be aware that a poor decision on this issue can have potentially serious financial consequences. Purdue’s interpretation of Residency is more restrictive than the Indiana Department of Revenue's.
If you are presently an In-State Student that will be working Out-of-State, definitely use your campus or parents’ address as your permanent address. You do not want to do anything to make your life more difficult (or expensive) at Purdue. You will probably have an additional State Tax form to file (see the State Tax Section), but overall your situation is fairly simple. Obviously, if you are an In-State Student working in Indiana, you really have no worries at all, from the Residency standpoint. You may use any address you wish.
If you are an Out-of-State Student, your situation is somewhat more complex. You will probably need to file a return in the state that you earned income plus your home state. You should check with a professional tax advisor about your situation and what you can do to minimize your tax bill.
FEDERAL INCOME TAXES: Need Federal Tax Forms? Call IRS FAX on DEMAND at (703) 368-9694. They will fax forms to you.
Federal Income Taxes are a progressive system that collects an increasing percentage of your income as tax the more money you make. There are numerous deductions and exemptions that are applied to your gross income to calculate your ‘Adjusted Gross Income.’ Federal Income Taxes are reconciled and due for the previous year each April 15th with form ‘1040’. However, the government likes to get its money sooner, so we estimate what we owe and let the government take a portion of our paychecks as ‘Withholding.’ You control the level of ‘Withholding’ by the number of ‘Exemptions’ that you claim on your ‘W-4’ form. The more ‘Exemptions’ you claim, the less ‘Withholding’ you will be subjected to. You should remember that you want to be roughly even with the government on April 15th (ideally, you want to pay them a little), so be careful in calculating your withholding level. If you know that you will not owe any Federal Income Tax (due to deductions, exemptions, and other write-off’s), and you did not pay any Federal Income Tax the year before, then you may claim ‘Exempt’ as a ‘Withholding’ level, and NO tax (for Federal Income Taxes) will be withheld. However, you should be careful with this status, because it will not change your tax liability. It only effects when you pay. You should be very careful using this status.
PAYROLL TAXES: Ready to Retire? Not yet, well it’s time to help those who already have!
Payroll taxes are straight percentages levied from your paycheck to support the New Deal era Old Age and Survivor’s Insurance Program, popularly known as Social Security. Each worker in the US is issued an account within the program designated by the ‘Social Security Number’. This is a three part, nine digit identifier number used by numerous government agencies, in spite of the fact that ‘It’s not supposed to be a Federal ID number!’ It just seems to have turned into one. After you have worked for several years, the government will begin sending you an annual summary of your contributions into the program. Once you retire, you will become eligible for an income supplement payment and a form of health insurance called ‘Medicare’. These programs are supported by the on-going payments into the system by the current workers and their employers. The current generation of workers supports the retired generation in this program.
The ‘Social Security’ or ‘FICA’ component of the Payroll Tax is levied as 6.2% of your salary. This amount is withheld each payroll period, and an equal amount is paid into the fund by your employer. There is a cap of $87,000 on the amount of salary that is taxable, so you only owe a maximum of $5,394 annually in FICA taxes. The ‘Medicare’ component of the Payroll Tax is levied as 1.45% of your salary. This is also matched by your employer, but there is no salary cap on the ‘Medicare’ component. Certain foreign Visa students may be exempt from Payroll Taxes, but you should check with a tax professional, prior to attempting to receive an exemption. All US citizens pay these taxes!
STATE TAXES: Need Indiana Tax Forms? Call Indiana TaxFax at (317) 233-2329. They will fax forms to you.
If you earn income in Indiana, whether you are a resident or not, you must file a State Return in Indiana.
** Residing in Indiana while attending a college or university does not itself establish legal residence in this state. If you maintain your permanent home in another state and earn money in Indiana, you are considered to be a full year non-resident of Indiana. You are required to report the income you earned in Indiana to your state of legal residence. AS WELL AS TO INDIANA on the non-resident return.
GROUP A: CREDIT TAKEN ON RESIDENT RETURN
Alabama, Arkansas, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Oklahoma, Rhode Island, South Carolina, Tennessee, Utah, Vermont, Virginia, West Virginia.
If you are an Indiana resident and derive income from these states, you are allowed to take credit for these taxes on your Indiana return. State taxes are taken out of your paycheck and a state tax form from the above states is filed. Then when you file your Indiana State taxes, you show the money paid as a credit.
If you are a resident of one of these states and make income from Indiana sources, you are allowed a credit on your resident state’s return for taxes paid to Indiana – you still file the non-resident form to Indiana.
GROUP B: NO INCOME TAX, NO CREDIT
Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming.
If you are an Indiana resident and receive income from one of these states, you must report the income to Indiana. There are no state taxes in these states; therefore, you pay no state taxes to them. If you are a resident of one of these states and derive income from Indiana, you file an Indiana non-resident form and pay taxes to Indiana.
**Remember, if you expect to owe $100 or more state and/or county income tax for the year, you are required to pay estimated taxes or receive a penalty. Go to the state tax office and they will help you estimate and give you the proper forms. Because you are estimating, you will need to file the LONG FORM rather than the Short Form.
GROUP C: REVERSE CREDIT AGREEMENT – CREDIT TAKEN OF F NON-RESIDENT RETURN
Arizona, California, Oregon, Washington, D.C.
If you are a resident of Indiana and receive income from one of these states, you must claim a credit on that state’s non-resident return for taxes paid to that state. You then file the normal Indiana State tax form and pay taxes to Indiana.
If you are a resident of these states and receive income in Indiana, you may claim credit on your non-resident Indiana state tax form for the amount of tax paid and then file your resident state tax form and pay appropriate taxes.
GROUP D: RECIPROCAL AGREEMENT STATES
Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin.
If you are a resident of Indiana and receive income from these states or if you are a resident of these states and receive income from Indiana, this income is taxable to your state of residence under the reciprocal agreements between Indiana and these states. Therefore, you do not have state taxes taken out of your paycheck. At the end of the year, you will show your income on the Indiana State tax form, or your state of residency, and pay the appropriate taxes.
** Remember if you expect to owe over $100 in state taxes, you need to pay estimated taxes to your state or pay a penalty.
If you have worked in these states and have had the state tax taken out by mistake, you have to wait and file a special form from that state to reclaim your money. You cannot claim a credit on your Indiana tax form.
COUNTY TAXES: Everybody wants a piece of the pie!
Beginning a few years back with continuing budgetary crises, most states passed optional County Income Tax laws. Local politicians, being the responsible lot that they are, couldn’t resist the added pool of ‘free money’ there for the taking, and so most of us now pay another percentage of our ‘Adjusted Gross Income’ to the local county Treasurer. Fortunately, this is typically handled as an add-on line in the State Income Tax Return, so there is very little additional complication involved in paying this tax. You simply should be aware that you do owe the tax, and in some cases, there are differing rates depending upon whether or not you are a resident of the county you earned the money in. You should investigate your local situation before it surprises you.
Good luck in your new Co-Op position, and remember the rest of your fellow citizens thank you for helping to do your part!
Disclaimer: This is Dr. Stwalley’s interpretation of tax codes, and, he is an educated layman, not a tax expert. Always seek professional advice.