How Much Federal Taxes Should Be Withheld?
Federal tax withholding started in 1943 to help taxpayers better plan for the tax bill they would have to pay when they filed their taxes. It was also used to lessen the blow of taxes because it's paid with money the individuals never had; it's taken out before they received their paycheck. Your paycheck has several federal tax deductions, including income taxes, Social Security taxes and Medicare taxes.
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Determine Annual Compensation
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How often you receive a paycheck will affect how much needs to be withheld, because withholding is based on your estimated annual compensation. If you are paid weekly, multiply your income by 52. If you are paid biweekly, multiply your income by 26. If you are paid monthly, multiply your income by 12. This will give you your expected annual income.
Determine the Number of Allowances
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To determine how much should be withheld from your paycheck, you should fill out a W-4 form to determine how many allowances you are entitled to claim. Allowances can be taken for yourself, your spouse, any dependents you will claim on your tax return, expenses for taking care of dependents and the Child Tax Credit. You have the option of claiming as many expenses as you are eligible for. If you claim fewer allowances than you are entitled to, you will likely have more money withheld than you need, so you will receive a refund when you file your taxes. If you claim all of your allowances, you may not have enough withheld; so although your take-home pay may be more, you may owe money when you file your tax return.
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Determine Withholding Amounts
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Determine the estimated annual taxable income by subtracting $3,700 from the annual income for each allowance claimed. For example, if your annual income was $60,000 and you claimed two allowances, your taxable income would be $52,600. Determine the estimated annual taxes by using the tax tables. For example, if you were single and had a taxable income of $52,600, your estimated tax would be $8,750. If you were paid monthly, you would divide your estimated tax bill by 12 and find that you should have $729.17 withheld for federal income taxes.
Determine Medicare Withholding
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In addition to income taxes, employers must also withhold taxes for the Federal Insurance Contributions Act, which includes taxes for Social Security and Medicare. The 2011 Medicare tax is 2.9 percent on all income. However, the employer is responsible for paying half of these taxes. To figure out how much should be withheld for Medicare, multiply your paycheck by 1.45 percent. For example, if you made $2,000 you would have $29 withheld for Medicare.
Determine Social Security Withholding
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For 2011, Social Security tax has been reduced to 10.4 percent on the first $106,800 of income. However, your employer is responsible for paying a larger portion of this tax. To determine how much should be withheld, if your annual income is below $106,800, multiply your paycheck by 4.2 percent. For example, if your annual income is expected to be $48,000, your monthly paycheck of $4,000 would have $168 withheld for Social Security.
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References
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