For dual income earners, both singles and married couples, they believe they are withholding the correct amounts based on their earnings, but they still owe money. There is a blind spot in their calculations.
Most people do contemplate the impact of additional sources of income into the family unit, whether from a second job, a new job, or the employment of a spouse. The withholding tables assume that the individual being paid is the only wage earner in the family unit and the wages are the only earnings of the family unit.
To answer the question, “Why is this big deal?” we must look at how taxes are calculated. To keep things simple, we are looking only at the basic tax rates and earned income.
The tax rates are graduated from 10.0 percent on up to 39.6 percent. The different levels of tax are charged only to the amounts that fall within that tax bracket bucket. Someone in the 28 percent tax bracket is only paying 28 percent on the taxable income that is above the amounts that exceed the top end of the 25 percent bracket. If a family unit only has one wage earner who has only one job, then the tax withheld should be appropriate (assuming the W-4 was completed properly).
The troubles begin with the second source of earned income. Remember, the tables assume there is only one wage earner. Now you have two incomes being applied to the same tax bracket bucket, filling each more quickly. Individuals could run into this same problem if they switched jobs during the course of a year. It also applies to people who work multiple jobs at once.
Be aware of the vertical impact of the tax brackets. Understand the need for the second or third source of earned income to assume a higher starting rate of tax (lower/less exemptions) and withhold accordingly.September 20, 2016 10:00 am