While some employers give employees pay stubs that break down their tax deductions for each pay period, others don’t provide that information. If your employer falls in the latter group, it can be difficult to understand how you were paid. Even if you get a pay stub, the statement doesn’t give the exact calculation. If you understand the tax-withholding process, it’s easy to determine whether you were accurately paid. To calculate tax withholding, you must know the taxes you’re liable for, and then compute them individually.
Determine taxable wages, which are your earnings after pre-tax deductions, such as health care plans and traditional 401(k) contributions. If necessary, ask your human resources or payroll department for a list of the company’s pre-tax deductions. Then, subtract your pre-tax benefits from your gross wages for the pay period to arrive at taxable wages. If you have no pre-tax deductions, all of your gross pay is your taxable wages.
Calculate federal income tax, unless you’re exempt, which means that your employer does not withhold the tax from your paychecks. You must meet the qualifications on the W-4 for the tax year in question to qualify for exemption. Otherwise, obtain your filing status and number of allowances respectively from lines 3 and 5 of the W-4. Then, retrieve IRS Circular E, the Employer’s Tax Guide online (see Resources). Apply the Circular E tax-withholding table that matches your filing status, taxable wages, pay period and number of allowances. The table gives the exact withholding amount.
Figure Social Security tax and Medicare tax respectively at 4.2 percent of taxable wages and 1.45 percent of all taxable wages, at the time of publication. Social Security has an annual wage limit of $110,100; Medicare has none. See the Circular E for the respective tax year or the Social Security Administration website for Social Security and Medicare tax rates.
Check with the state revenue agency, or your payroll department, for state and local withholding requirements. You might be required to use the state tax-withholding tables and your state tax form or federal W-4 to calculate state income tax. Or, a flat percentage of your taxable wages might be required. The same goes for local income tax, if applicable. Local income tax generally comes in the form of city or county tax.
Subtract additional taxes, if required by the state. For example, Pennsylvania, Alaska and New Jersey require employees to pay state unemployment tax. California requires that employees pay state disability insurance. Contact the state unemployment agency for these tax-withholding rates, if applicable.
To figure your take-home pay, subtract any other deductions that you have from your wages after tax withholding. Such deductions may include garnishment or after-tax voluntary benefits, such as Roth 401(k) or union dues.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.