The Tax Implications of Being Paid Once a Month

Getting one big paycheck each month has its advantages. For one thing, you can pay all of your bills at once and be done with it. If you are used to receiving a paycheck every week or two, having a monthly payment can take time to get used to. Your employer withholds more money for taxes each payday to compensate for the longer pay period. A monthly paycheck does not affect your overall tax liability or how you prepare your tax return. You do need to ensure enough taxes are withheld from each paycheck.

Tax Liability

For a given pay rate, your earnings at the end of the year are the same whether they are divided into 12 monthly paychecks, 52 weekly paychecks or some other arrangement. Since your annual income is what determines how much you owe in taxes, this means the number of pay periods does not affect your tax liability. For example, if you are paid a salary of $750 per week and your employer change to a monthly pay schedule, your monthly pay will be $3,250. Either way, this works out to $39,000 for the year. That is the amount used to compute your tax liability.

Withholding Allowances

When you fill out the W-4 form your employer gives you, you state your marital status and use the worksheets to determine how many withholding exemptions to claim. Your employer subtracts the value of your withholding allowances from your gross pay before calculating your federal income tax. This shouldn't concern you if you are paid monthly because the amount of a withholding allowance is adjusted for the length of the pay period. For instance, in 2011, one withholding allowance equaled $3,700. This amount is divided by the number of pay periods. Thus, if you are paid weekly, the withholding allowance was $71.15, but if you were paid monthly it was $308.33.

Tax Calculation

Your employer applies the same approach to figuring your payroll tax deduction that was used to calculate the amount of a withholding allowance. That is, annual amounts are divided up according to the number of pay periods. In practice, most employers use percentage tables published by the IRS. Suppose you made $2,600 per month after deducting your withholding allowances and you were single in 2011. Your payroll tax is zero for the first $175, 10 percent of the amount from $175 to $833 and 15 percent of the amount over $833. If you were paid weekly, your taxable pay was $600 and you were taxed like at a rate of zero on the first $40, 10 percent on the amount from $40 to $204 and 15 percent on the amount over $204. At the end of the year, you end up with the same amount of tax withheld.

Adjusting Your Withholding

The system of payroll tax is designed so that at year’s end you have paid most of your taxes and won’t owe a big lump sum. However, this system does not take into account factors like a second job, self-employment income or investment earnings. Many people allow for such factors by requesting on their W-4 that extra tax be withheld. But be careful. If you’ve had $20 per week taken out in the past, it works out to $1,040 extra to cover the taxes on other income. You have to adjust the amount to allow for the number of pay periods. Thus, if you want to have the same amount of extra tax withheld, divide the $1,040 by 12 and ask for $87 extra to be taken out of your monthly paycheck.