Every payday when you get your paycheck, taxes are taken out. Your employer uses information you provide to figure your payroll taxes according to Internal Revenue Service rules and sends the money directly to the IRS. The idea is to spread tax payments out over the entire year so that you don’t end up owing a lot of money when it comes time to file your tax return.
The amount of money that the IRS takes out in taxes depends on your current income bracket as well as the specific exemptions you claim on your paycheck.
Understanding Withholding Basics
When you were hired, your new employer gave you a Form W-4 to fill out. After completing the accompanying worksheets, you provided information such as your marital status and the number of exemptions you chose to claim. Called withholding allowances, exemptions reduce the amount of your pay that is used to calculate federal income tax withholding and so lowers the amount of tax taken out of your paycheck. You may claim fewer exemptions than you are entitled to, but not more. If you'd prefer to have more taken out of your account, claim the maximum you're allowed. However, you may find this results in a sizable refund check at tax time, meaning you're giving the government an interest-free loan. Instead, you could set some of the money aside and pay if you owe a little at the end of the tax year.
Identifying Eligible Allowances
Due to new tax legislation passed in late 2017, employers calculate tax based on the 2018 Percentage Method Tables and Wage Bracket Method Tables for Income Tax Withholding. Your taxes are held out based on your wage range and the number of allowances you specified on Form W-4.
Federal Income Tax Basics
Federal income tax is a progressive tax. This means that, as your earnings go up, you pay a higher percentage of tax on each added dollar. The rates are divided into tax brackets. For example, suppose your wages are $650 for a week and you are single and claim two withholding allowances. Take off $159.60 for the allowances, leaving $490.40. You'll pay $18.30 plus 12 percent on that amount, which works out to $77.50. If you make more money, the dollar amount and percentage gradually increases until it reaches a maximum of $2,898.10 plus 37 percent. Note that your withholding allowances lower the amount that would have been taxed at the highest rate for your income level.
Identifying Other Taxes
Federal income tax isn’t the only tax taken out of your pay. You also pay Medicare tax and Social Security tax. Both taxes are applied to your gross income before taking off withholding allowances. The rate for Medicare is 1.45 percent. For Social Security, it is 6.2 percent. Because these taxes are levied on your gross income, the number of withholding allowances doesn’t change the amount you pay.
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.