Starting out with a new job these days implies much more than it used to. Many don’t think much about the fact that they actually receive a lot less money than they actually make. This is mainly due to the various types of tax withholding that are imposed in the United States.
The amount of money that is withheld is mainly based on how much of your payment is taxable as well as the period that is covered by the paycheck. Federal law requires all employers to withhold a certain taxable; however, even though the amount is mandatory to be paid, you can at least be informed about what exactly you have to pay for and how you can calculate it yourself so that you don’t lose any money.
Types of Paycheck Withholding
There are numerous types of deductions that can be either voluntary or involuntary. Involuntary taxes are legally binding and cannot be avoided while the voluntary ones can be stopped by the employee at a certain point. There are several types of paycheck withholding, some of which we will explain below:
• Federal Income Tax: This is perhaps the most important tax that United States citizens have to pay. The tax is applied to both businesses and regular individuals and is calculated according to the overall yearly income of a person. Sources of taxable income that is used for paying this tax can include not only wages but also income gained from stock dividends, stock sales or even unearned income received in the form of gifts.
• Payroll Taxes: These taxes are asserted by the federal government and apply to all 50 states. They generally refer to a sum of various taxes such as Medicare or the Social Security tax. These are also called Federal Insurance Contribution taxes and they represent a total of roughly 8% of all gross earnings. Payroll taxes can be changed within most states and remain the same in others as they depend on the policy of every particular state.
• Wage Levies: Like payroll taxes, wage levies or garnishments are also statutory (involuntary). These represent orders made by the court or some other type of legal entity that force the employer to withhold a specific amount from an employee’s paycheck to pay for a debt, for example. This type of tax is usually limited to about 25% of the employee’s disposable income.
• Voluntary Deductions: These are deductions chosen by the employee himself. They mainly include medical and life insurance, union dues, various fees, retirement contributions and so on. Some of these are what are called after-tax deductions, meaning that they do not lower the taxable income. Instead, they draw money from the disposable income.
The Steps for Calculating Paycheck Withholding
1. Your Income: The first step required is to total all your wages and every kind of compensation that can be applied to your pay period. This must first of all include the your regular paycheck as well as overtime bonuses, commissions or tips. The sum of all these payments is called your “gross income”. All taxes that you have to pay are then deducted from this amount.
2. Calculate the Amount for Payroll Taxes: The next step is to calculate your payroll taxes. Medicare is 1.45% of the gross income and Social Security amounts to about 6.2%. If you already have your annual earnings put on paper, using a simple calculator you can compute the data, getting the amount in dollars separately for each of the taxes. Then, by summing them up, you get the total of your annual payroll taxes.
3. Calculating your Taxable Income: The first thing you need to do is count your withholding allowances. Withholding allowances basically help you reduce the federal income tax by allowing for certain exemptions; so the more allowances you apply for, the less tax you have to pay. Nevertheless, you need to be careful, because your form can be blocked if you apply for too many withholding allowances especially if you cannot give any sound reasons for them. If you have allowances, you need to look into your W-4 form and get their number as well as the filing status.
Your number of allowances then has to be multiplied by the value for one allowance in order to get the overall value of all your withholding allowances. You can find the value as well as detailed insight on how to use tax withholding tables in the last chapter of the “(Circular E) Employer’s Tax Guide, Publication 15.” The guide is available for free on the internet.
After you get your allowances sorted out, the formula for calculating your taxable income is basically simple: subtract all allowances and deductions from your adjusted income (the adjusted income, besides wages, also includes interest income you earn – for example, from savings accounts).
If, for example, you earned a total of 20,000 from your wages along with 5000 dollars from a part time job and $100 interest from a savings account then your adjusted income will be $25,100. After subtracting your allowances and deductions you will be left with a smaller amount that represents your taxable income.
4. Estimating the Federal Income Tax: Once you have the exact amount of your taxable income, calculating the federal income tax is easy. You will have to use Publication 15 again in order to see the appropriate percentages that apply to your filing status. The percentages rise depending on how great your income is. The first 50 dollars for example may not be taxable, but, gradually, the percentage that will be your income tax can grow even over 15%.
5. Other taxes: Of course, the federal income tax is the largest amount you will need to pay out of all types of taxes. Nevertheless, other taxes, together, can amount to even more. Calculating the rest of your paycheck withholding amount is easy however, since you simply need to add everything else that your employer may need to pay for you, like state and local taxes, post-tax deductions and reimbursements, as well as various types of insurance.
It may be difficult to obtain the precise amount of your paycheck withholding, but you can at least estimate it as accurately as possible. The internet can also help you with this, as there are a very large number of free deduction calculators available online that can quickly get you through the entire process while also assisting you to precisely locate all the taxes and deductions that may apply in your particular case.
Using the Internet to Calculate Paycheck Withholding
If you use the internet regularly you may have noticed that there are many interactive calculators of every kind that can help you manage your finances. Payroll deduction calculators have been introduced on many websites to help people quickly assess their situation and determine exactly how much tax they have to pay and how much of their real income actually ends up in their pocket.
If you simply type “paycheck withholding calculator” in any search engine you will find dozens of results containing links to web pages that have relevant calculators. At first glance, the calculator may seem to be simple: a form that you have to fill in to get the results you need.
The form will be surprisingly simple, most likely containing fields where you have to type information about your pay (pay type, amount and pay frequency), the state you live in, your marital status, as well as additional information about the number of withholding allowances you have for example.
If you enter all the data accurately and press the “Calculate” button, you will get a detailed list containing your income (both gross and net) as well as some of the most important taxes you have to pay: the federal income tax, social security, Medicare and others. Depending on how thorough the calculator may be, you may also be able to get information on other types of taxes, including state and local taxes, voluntary deductions and maybe even wage levies.
Generally, many experts consider that it is a great advantage if you know how to calculate all your paycheck withholding taxes yourself. There are many cases when companies get away with taking away a lot more money than they should, just because employees don’t pay much attention on how much their taxes truly amount to.
However, with the appearance of websites that can help you calculate your taxes or that even compute them for you, people are much more informed these days about all the numbers that are actually involved in their paycheck calculation. With this new clarity, you not only have more options when it comes to calculating your income precisely, but you also have the opportunity to save money that you might otherwise lose.
Because people are more and more informed about such things, the future of tax calculation is even brighter, as more and more complex calculators appear every day. Such programs can often help you effectively assess your entire financial situation and get all the results you can possibly need.