Withholding taxes
The other way in which the tax-free threshold can impact you is if you work as an employee for two different companies. If you work as a freelancer, you’re required to pay your own taxes on the income that you earn. The tax rates for sole traders are the same as individual taxpayers. This means the $18,200 tax-free threshold is available for both sole traders and individuals. As a sole trader, you’re required to withhold and pay your own income taxes.
But, if you’re an employee, your employer is required to withhold tax on your behalf. To start this process, your employer will provide you with a tax file number (TFN) declaration form. If you utilise the Centrelink system, you can receive this TFN declaration form through it as well.
You’ll provide information to complete this form. One of the most important questions on this form is Question 8, which asks, ‘Do you want to claim the tax-free threshold from this payer?’ You’ll want to choose ‘Yes’.
Your employer will then track how much you’ve earned. Once you exceed the tax-free threshold, the employer will then begin withholding taxes on the excess.
Where this becomes a bit more interesting is if you’re working as an employee for two different companies. Again, if you’re working as a sole trader in your second role, you’ll probably just claim the tax-free threshold through your primary employer.
But what do you do if you have two employers? And, what do you do if you receive a government allowance or taxable pension but also work in a part-time role?
In these cases, you’re going to claim tax-free threshold rates from the employer or payer that pays the highest salary. That’s because the second employer is required to withhold tax at the ‘no tax-free threshold rate’. This serves as a tax offset and helps reduce the likelihood that you’ll owe extra tax at the end of the year.
If you happen to have too much tax withheld throughout the year, you’ll receive a tax refund.
One way to avoid having too much money withheld is by tracking your funds and filing a withholding only when you cross the tax-free threshold rate. If you do so, you’ll need to file a withholding declaration with your employer.
Filing a withholding declaration instructs your original employer to withhold funds. This pay-as-you-go system creates fewer problems down the road and attempts to reduce the amount that you’ll owe at the end of the year.
If you happen to notice that employers are withholding way too much money from your paychecks, you’ll need to submit a PAYG withholding variation application . Upon doing so, the government will look at your earnings and come up with a varied withholding rate. The government will then pass this rate on to your employers who will institute the changes on your next pay stub.
Requesting a withholding review is not something that you should treat lightly, however. There are only certain circumstances in which you’re allowed to make such a request. The first is that you’re certain of your income amounts. Keeping diligent records, like payment summaries, is an excellent way to show how much you’ve earned.
Second, you’ll need to be disadvantaged by the current withholding rates. You should not apply merely to see if you can secure a better tax rate. You should have proof, or a strong inclination, that you’re losing money under the current rate system. The purpose of withholding variation is to ensure the amount you withhold during the year is as close as possible to your year-end tax liability.
