Federal income taxes are an unavoidable bother. Uncle Sam will always get its cut of the action, using the IRS to collect whenever people happen to earn. While people who are self-employed may end up with a different situation, the average person with an employer will have taxes withheld from every paycheck. Federal income tax withholding is based on a rough guess from the IRS about what taxes you will owe at the end of the year. If you happen to pay more in taxes than you end up owing, then the money will be returned to you in the form of a tax refund. With this in mind, how much in federal taxes will be taken out of your paycheck? Here’s how to figure it out.
Claiming exemptions to reduce tax withholding
When you start a new job, you’ll likely be required to fill out some financial forms. One of those forms will ask you the number of income tax exemptions you happen to have. Income tax withholding exemptions allow you to reduce the amount of tax an employer will take out of your paycheck. You are legally allowed to do this based upon things like dependents and head of household status. This can be dangerous, of course, because it can mean that you end up owing tax at the end of the year. Most people will not be able to claim enough exemptions to reach this level, however.
Tax withholding based on your tax bracket
Withholding from your paycheck is done on what is known as the graduated system. You owe tax at a progressive rate depending on how much you earn. For instance, the first $9,525 you earn each year will be taxed at a 10% federal rate. Everything from $9,526 up to $38,700 will be taxed at 12%. From $38,701 to $82,500 will incur a marginal tax bracket of 22%. This rate gets progressively higher the more money you earn.
When your employer does withholding, they do so on the basis of these tax brackets, taking into account the number of times you are paid each year. For instance, if you get 26 paychecks per year and each paycheck is $4,000, then your total yearly salary is $104,000. Your paychecks will be pro-rated according to your yearly tax bracket. At the end of the year, you will have the opportunity to claim income tax exemptions and deductions from income that will cause the government to issue a tax refund in your favor.
Taking into account Social Security and Medicare taxes is also important. All employers will withhold the total amount of your expected contribution to these systems. This means that 6.2% of your check each month with be withheld for Social Security, while 1.45% will be withheld for Medicare taxes. If you happen to be able to reduce your taxable income at the end of the year, you will also be entitled to a refund on any money paid to cover these expenses, as well. Social Security and Medicare taxes are capped, so any income you earn over $127,200 will not be subject to those taxes.