Altitude Solutions Tax Professionals

Types of earned income

Wages, salaries, or tips where federal income taxes are withheld on Form W-2, box 1
Tip income not reported to your employer
Note: Include the full amount of tip and overtime income in the calculation of earned income when determining eligibility for the Earned Income Tax Credit, even if all or part is deductible.
Household employee wages
Medicaid waiver payments excluded from income on Schedule 1 (Form 1040)
Income from a job where your employer didn’t withhold tax (such as gig economy work) including:
Driving a car for booked rides or deliveries
Running errands or doing tasks
Selling goods online
Renting equipment
Renting out property or part of it
Providing creative or professional services
Providing other temporary, on-demand or freelance work
Money made from self-employment, including if you:
Own or operate a business or farm
Are a minister or member of a religious order
Are a statutory employee and have income
Taxable benefits from a union strike
Certain disability benefits you got before you were the minimum retirement age
Nontaxable Combat Pay (Form W-2, box 12 with code Q)
If you claim nontaxable combat pay as earned income, it may increase or decrease the amount of your EITC. For more information, see Publication 3, Armed Forces' Tax Guide.

What You Need to Know About Your W-4 Form

So many taxpayers go all year without enough federal taxes being withheld from their paycheck, and then tax time comes and they’re disappointed because they either owe or their refund is much smaller than expected. Most of the time, the issue isn’t the tax return—it’s the W-4 form. The form confuses a lot of people. When the new W-4 was designed, it was meant to allow taxpayers to take home more money in their paycheck instead of waiting for a refund. Unfortunately, that has led to many people having little to no federal withholding and being shocked when it’s time to file.

One thing many people don’t realize is that if you don’t properly indicate on your W-4 that you have more than one job or that you’re married and they have income, you will almost always have too little tax withheld. For the correct amount of taxes to come out, the form needs to reflect your entire situation. Leaving out key details causes under-withholding.

Another major issue is the dependent section. When the form asks you to list dependents and multiply by $2,000 or $500, many people put all their dependents there without understanding what it means. That section is essentially allowing you to receive the child tax credit throughout the year in your paycheck instead of as a refund. When people enter dependents they won’t actually qualify to claim or enter too many—it results in little or no federal taxes being withheld.

Then there’s the exempt box. When you check exempt, the employer withholds zero federal taxes. So it’s not the bonus, overtime, or paycheck size that caused the issue—it’s how the W-4 was filled out. If no taxes are coming out, it’s because the form told payroll not to withhold them.

At the end of the day, taxes come down to a decision. You can choose to take home more money in your paycheck during the year and possibly owe or get a smaller refund, or you can have more taxes withheld and potentially receive a larger refund if you qualify for certain credits. There’s no right or wrong choice but it is a choice, and only a small percentage of taxpayers can have both higher take-home pay and a large refund.

The key is understanding your W-4 so your paycheck and your tax return aren’t working against each other.

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