Federal Income Tax Payroll Deductions
Sometimes getting your paycheck can be a little depressing. You thought you made a good amount of money but then your paycheck is significantly less, thanks to all of those deductions made by the federal government. Understanding these deductions will help you know how much to expect to actually receive in each paycheck. In addition, it is important to know of ways to reduce your tax liability and therefore lower the amount of federal taxes that are withheld from your pay.
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Filling Out the W-4
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When a person is hired by a company, one of the first forms that must be filled out is the W-4. This form helps the company determine how much money should be withheld from that person's paycheck for federal taxes. The W-4 is a simple worksheet that asks the employee to read each line and write a 0, 1 or 2 in the blank space after each line. The employee then adds up the total of all the numbers filled in on the worksheet to get a withholding allowance. The employee can also fill in a spot on the form requesting than an extra amount of money be withheld from each check. Some reasons to do this would be to guarantee a big refund at the end of the year or to compensate for self-employment income taxes.
Employer Responsibility
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The employer will use the numbers from the W-4 to determine how much money to withhold from the employee's pay check each pay period. The goal is generally for the employer to take out just enough taxes so that the employee does not owe anything at the end of the year. The employer then deducts a percentage from each paycheck and sends that money to the government.
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Federal Tax Rates
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The amount of federal tax that is deducted from the employee's paycheck is based on a graduated tax system. A person's first $8,000 or so (it changes a little each year) is taxed at 10 percent. But earnings from $8,000 to about $32,000 are taxed at 15 percent. The first $8,000 is still only taxed at 10 percent, though. When a person reaches a higher tax bracket, she only has to pay the higher taxes on the amount that is in that bracket. If a person makes $79,000 and the next tax bracket starts at $78,000, for example, only the last $1,000 would be taxed at the higher tax percentage.
Other Federal Payroll Deductions
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The other federal payroll deduction is usually listed as just one line on the paycheck, called FICA. FICA is actually a combination of two taxes. The Social Security tax is 6.2 percent of your income and it helps to fund Social Security payments for the elderly and disabled. The second part is a tax for Medicare, which helps pay the cost of health care for certain people. The Medicare tax is 1.45 percent of your income. Employers are required to match all payments made by their employees for FICA taxes. Therefore if a person's FICA deduction was $20 one pay period, the company must send the government $40 -- $20 from the employee's paycheck and 20 out of the company's own pocket.
Other Deductions Affecting Federal Taxes
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Other deductions from the payroll check that can affect the amount of federal taxes deducted. Putting money into a 401(k) retirement savings account lowers the employee's taxable income. Some employers offer child care expense accounts and health savings accounts. Contributing to these also lowers the employee's taxable income. In addition, paying for health insurance through an employer lowers the amount of income that is taxed. All of these payroll deductions reduce the amount the employee must pay in federal taxes, therefore lowering the amount of federal taxes deducted each pay period.
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