Some workers think employees must earn a minimum amount before employers start withholding for federal taxes. That is not the case; there is no minimum amount you must make before a paycheck has withholding tax taken out. Not everyone has to file a federal income tax return, but even if you're not required to file a tax return, you're not tax exempt for withholding purposes. Even if you don’t earn enough money to file an income tax return, you have to file a return if you want to receive a refund.
There is no minimum at which point your paycheck becomes exempt from taxation unless you have specified on your W-4 that no tax should be withheld. That being said, the more withholdings you claim during the year, the greater the likelihood that you will owe tax at the end of the year.
Federal and State Taxes and Your Paycheck
The amount of tax withheld is found on your Form W-2, Wage and Tax Statement. Your employer furnishes this form to you annually. The amount of tax that is withheld from your paycheck depends on the information you provide your employer with the W-4 form, which you fill out when you begin employment for an employer. On the W-4, you let your employer know whether to withhold tax at the higher single rate or the lower married rate, depending on your marital status. You can also claim allowances to have additional tax withheld. If you have too much tax withheld from your wages, you receive a refund after filing your annual income tax return. If you don't have sufficient tax withheld, you could pay a penalty. The IRS charges the penalty if your withholding amount doesn’t account for 90 percent of your tax liability for the current year or 100 percent of the previous year. The IRS uses the lesser amount of the two as the standard.
Withholdings and FICA Taxes
Income tax withholding is not just levied on your regular wages. If you receive a commission or bonus, your employer withholds tax amounts. The tax on “supplemental wages,” as the IRS refers to them, may be withheld in one of two ways depending on whether your employer combines your bonus or commission with your regular wages in your paycheck or issues a separate check. If the supplemental wages amount is included with your regular wages, tax is withheld is the same rate as applied to your wages.
You also have to pay FICA taxes. The Federal Insurance Contributions Act taxes fund both Social Security and Medicare.
Many states also impose their own income taxes, and if you live or work in one of these states, expect to have those amounts also withheld from your paycheck.
2018 FICA Rates
For the 2018 tax year, mandatory FICA deductions will be taken from all employee earnings up to $128,400 for Social Security and with no cap for Medicare. The FICA tax rate for 2018 is 7.65 percent, which is comprised of 6.2 percent for Social Security taxes and 1.45 percent for medicare tax. Your employer will also pay that same amount so that the government receives a total of 15.3 percent. If you're self-employed, you must pay the entire 15.3 percent on your own.
This means that if you make $200,000 per year, you will be taxed 6.2 percent on $128,400 for Social Security tax and 1.45 percent on $200,000 for Medicare tax.
2017 FICA Rates
For employees in 2017, these mandatory deductions were the same as they are for 2018, but the earnings cap for Social Security in the 2017 tax year was $127,200.
- IRS: Topic Number: 751 - Social Security and Medicare Withholding Rates
- IRS: Withholding Tax: The Basics, Information About Federal Income Tax Withholding
- IRS: Publication 17 (2017), Your Federal Income Tax
- Journal of Accountancy: Social Security Administration Announces Large Increase in 2017 Wage Base
- Thomson Reuters: Social Security Wage Base Increases to $128,700 for 2018
- IRS. "FAQs on the 2020 Form W-4." Accessed Oct. 16, 2020.
- IRS. "Tax Withholding for Individuals." Accessed Oct. 16, 2020.
- IRS. "Topic No. 753 Form W-4—Employee's Withholding Allowance Certificate." Accessed Oct. 16, 2020.
- Social Security Administration. "Fact Sheet Social Security." Accessed Oct. 16, 2020.
- Social Security Administration. "Contribution And Benefit Base." Accessed Oct. 16, 2020.
- IRS. "Topic No. 608 Excess Social Security and RRTA Tax Withheld." Accessed Oct. 16, 2020.
- IRS. "Publication 531 (2019), Reporting Tip Income." Accessed Oct. 16, 2020.
- IRS. "Group-Term Life Insurance." Accessed Oct. 16, 2020.
- IRS. "Questions and Answers for the Additional Medicare Tax." Accessed Oct. 16, 2020.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including Sapling, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.