No matter what you do for a living, you will need to compute the taxes you owe and pay those taxes. If you work for someone else, your employer should automatically withhold federal income taxes, Social Security taxes and other applicable taxes from your paycheck. If you work for yourself or do business as a consultant, you will need to make these calculations on your own. Whether you work a traditional job or are self-employed, it is important to know how to calculate your federal income tax liability. Knowing what you are paying and what you may still owe will make tax planning and tax preparation a lot easier.
Things You'll Need
- Tax forms
- Tax filing software
- Internet access
- Pay stubs
Get a copy of your most recent pay stub and look at the gross amount of your pay. Then locate the block that lists F.I.T. This is the federal income tax withheld from your check.
Divide the amount of federal income tax withheld from your check by the amount of your gross pay. This is the percentage of income tax you are paying. For instance, if your gross pay is $1,000 and your federal income tax withheld is $200, you are paying F.I.T. at a 20 percent rate.
Pull out a copy of last year's tax return and compare the total tax liability shown on the 1040 to the total that will be withheld from your paycheck this year. You can calculate the total F.I.T. that will be withheld by multiplying the number of paychecks per year by the amount of federal income tax shown on your current pay stub. For instance, if you are paid twice a month and the F.I.T. on your pay stub shows $200, your total tax withheld for the year would be $4,800.
Determine whether or not it would make sense to adjust the amount of your withholding. If the current F.I.T. withheld will not be enough to cover your tax liability, having additional taxes taken out each pay period will help you avoid any underpayment penalties. If you are having too much F.I.T. withheld, adjusting your withholding amount will mean more money in your pocket each payday.
Review your most recent tax return if you are self-employed and make sure you are paying enough F.I.T. to cover your liability. If you are in business for yourself, you will probably need to file quarterly tax returns and make quarterly payments using form 1040-ES. Use a tax preparation software package that provides support for this form to complete it electronically and figure the amount of F.I.T. you will owe.