ANSWERS: 1
  • The federal income tax is a pay-as-you-go system. Employees have money withheld from every paycheck; that money is sent to the government every three months. In addition, payroll taxes for Unemployment Insurance, Medicare and Social Security are deducted from every paycheck. More than 40 states and several cities add income taxes as well, so the withholding rates vary from place to place.

    Figure the Percentages

    If you are a regular wage employee, you can easily figure out how much of your pay is being deducted from each check. Your pay stub lists all the deductions for each pay period and the Year-to-Date amounts. Dividing your gross earnings by the total deductions will give you the average percentage of the deductions. So, if you've earned $853 (your gross pay) and the deductions total $34.96, your withholding rate is about 24.4 percent. The IRS also has an employee payroll tax calculator online.

    For Employers

    Things are a bit more complicated if you're the one writing the checks. "Wages subject to federal employment taxes generally include ... salaries, vacation allowances, bonuses, commissions and fringe benefits. It does not matter how you measure or make the payments," according to the IRS' Employer Tax Guide. Signing bonuses and any money paid to an employee for canceling an employment contract also count as wages for federal tax withholding purposes. The amount of the payroll tax for each employee will be different, depending on how much their salary or wages come to on an annual basis, how many dependents they claim and what pretax deductions, such as IRA or 401k contributions, are being taken out of their pay. In the relatively few cases where local city or county income taxes are withheld, where the employee lives may also figure into the equation. Fortunately, you're not left to figure all these things out on your own. The tax guide (Internal Revenue Service's Publication No. 15) contains a set of tax tables that give you the dollar amounts of the withholding tax in $5 increments of gross pay for each pay period (weekly, monthly, etc.) and for single and married taxpayers and the number of dependents they claim on their W-4 form, by category. There is also a set of tables for figuring the withholding tax based on income brackets. Individual states also have tax tables available.

    Complications

    There is a long list of other things that can affect the amount a person owes in federal taxes, such as Advanced Earned Income Credits and their immigration status if they are not U.S. citizens. The tax guide goes into detail about each of these and how they affect your tax deductions, as well as information about when and how to pay the quarterly withholding taxes.

    The Easy way

    Instead of doing all this work yourself, including acquainting yourself with the rules and regulations for your state, city and county payroll taxes, you can use one of the tax calculators available on various websites. Bloomberg.com and Bankrate.com, among others, have tax rate calculators that you can use for free on their Web pages.

    Source:

    IRS Employer Tax Guide

    Bloomberg.com Tax Withholding Calculator

    More Information:

    Bloomberg.com Tax Withholding Calculator

    Bankrate.com

    IRS Employer Tax Guide (Pub. 15)

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