I’m Taking a Crisis Contract – Why Do I Have So Much Taxes Taken Out?
Several travelers are accepting short term assignments in areas affected by the COVID pandemic. These assignments pay significantly more than regular traveler contracts and are often for a shorter duration than 13 weeks.
What about the taxes?
This is covered in other posts on our blog, but there are three things to note:
1) What is withheld from your paycheck for taxes is not the actual tax – it is an estimate of the taxes owed on the income you earned during the pay cycle.
2) The tax withholding will be higher in percentage terms since the calculation of the withholding ASSUMES you will earn the same amount each paycheck for the remainder of the year.
3) The reality is that you will not earn this much with each check all year.
This leaves you two choices: You can either change your withholding short term or just let the withholding run the normal rate. If the latter, any tax payments that are more than needed will be refunded when you file your return the following year.
Here is an illustration:
Jane normally earns $50K a year but has an opportunity to earn $7500 a week for 4 weeks on a crisis contract. She will earn $30K during the 4-week assignment, but $80K for the entire year (50+30). The tax withholding on the crisis contract will ASSUME she makes $7500 a week or $390K a year. $390K vs $80K is a big difference but it shows you why the withholding is so high.
What should your tax withholding be if you want to adjust it? Everyone’s situation is different so this will not work for everyone. Whatever you decide, DO NOT FILE EXEMPT.
The one approach you can use is as follows using Jane as an example:
Calculate the amount you would earn if you worked the crisis shift all year ($390K)
Subtract the amount you expect to earn for your calendar year income ($80K)
Subtract your standard deduction whichever applies (married $25k, single $12k or head of household $18K)
Jane's example: Crisis income all year ($390K) - Calendar year income ($80K)- single standard deduction ($12K)= $298K
Put the amount you come up with using this formula, on Line 4B on the W4 Withholding Form (to change the tax withholding based on your ACTUAL income for the calendar year).
If you stay at that crisis contract longer (extend), then your W4 needs to be adjusted again to accommodate the change.
This takes care of the Federal withholding. Every state is different, but if they use the old formulas that ask for EXEMPTIONS, claim Single and 5 or Married and 5.
And finally, after you are done with the crisis contract, CHANGE the withholding back to where it was before you started. AND, be safe!