How to Understand Federal Taxes & Your Paycheck
Most employers compensate their employees with a paycheck. The Internal Revenue Service requires employers to withhold federal income tax from employees' paycheck. Employers must also withhold Social Security and Medicare taxes. The IRS is the federal institution that administrates the collection of these taxes. Understanding federal taxes and your paycheck helps you to determine if you were accurately paid.
Other People Are Reading
Instructions
-
-
1
Learn how to read your paycheck. The top portion states your take-home pay; the bottom portion is your pay stub. Most states require employers to include the employee's current wages and deductions on the pay stub. The pay stub may show regular hours, regular pay rate and gross regular wages. If overtime applies, the hours, overtime rate and gross overtime wages are usually included on a separate line, beneath regular wages. If salaried, the gross salary is stated instead of regular wages. Your current deductions may show under a separate column, and includes payroll taxes, and voluntary benefits, such as health and retirement benefits. Your employer may choose to state your year-to-date deductions as well.
-
2
Learn the abbreviations for federal taxes on your paycheck. Federal income tax is often abbreviated as FWT or FIT, Social Security as SS, and Medicare as Med.
-
-
3
Add up all gross wages paid to you. Gross wages is your pay before deductions are made.
-
4
Deduct voluntary pre-tax deductions, if applicable. Pre-tax deductions, such as traditional 401(k) plans and flexible spending accounts, are deducted from your pay before taxes are withheld. This process lowers your taxable wages.
-
5
Deduct federal taxes. Federal income tax is based on your filing status and allowances and the IRS withholding tax tables (Circular E). The IRS allows you a certain amount for each allowance you claim on your W-4 form---this lowers your taxable income. For example, for a weekly payroll in 2010, you are allowed $70.19 per allowance. For a bi-weekly payroll, you get $140.38 per allowance since the pay period is based on two weeks. You must use the Circular E to figure federal income tax. As your employer for a copy of the Circular E or access it via the IRS website.Suppose you earn $450 weekly and claim married with two allowances. According to page 43 of the 2010 Circular E, your federal income tax is $5.
-
6
Subtract Social Security tax at 6.2 percent of your gross earnings and Medicare tax at 1.45 percent.
-
7
Deduct post-tax deductions, such as Roth 401k and donations. The remainder is your take-home pay.
-
1
Tips & Warnings
If state income tax applies, calculate it according to your state revenue agency's guidelines and deduct it from your gross pay.
If you claim more allowances than you are entitled, you may end up owing the IRS when you file your taxes. If you claim less than you're entitled to, you have to wait until tax time to receive a refund. Use the IRS withholding calculator to determine if you need to give your employer a new W-4 to avoid underpaying or overpaying federal income tax.
References
Resources
- Photo Credit C Squared Studios/Photodisc/Getty Images
