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. Not everyone has to file a federal income tax return, but that is not the same as not having federal taxes withheld from paychecks. For 2017, single workers earning less than $10,400 and married couples earning less than $20,800 do not have to file federal tax returns. 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 for taxes withheld from your paychecks.
State Income Taxes
Many states impose income taxes, and if you live or work in one of these states, expect to have those amounts also withheld from your paycheck. If too much money is withheld for state tax, you receive a refund when you file your state income tax return.
Commissions and Bonuses
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. If your employer pays the bonus or commission amount separately, a flat 25 percent rate is withheld. In the case of the rare employee who earns more than $1 million in commissions or bonuses, the employer withholds 39.6 percent in tax for 2017 on the monies exceeding the $1 million mark.
The Federal Insurance Contributions Act (FICA) taxes fund both Social Security and Medicare. For employees in 2017, these mandatory deductions comprise a total of 6.2 percent of their earnings up to $127,200 for Social Security and 1.45 percent of earnings for Medicare, with no income limits. Employers pay a matching amount in FICA taxes for workers. Self-employed people are responsible for paying the entire tax amount of 15.3 percent on their incomes.
The W-2 and the W-4
The amount of tax withheld is found on your W-2 form, 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.
While many people look forward to receiving an annual tax refund, the refund means you had too much tax taken out of your paycheck, and you gave the government the equivalent of an interest-free loan on your money.
- 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