The Internal Revenue Service requires your employer to take money out of your check every payday to pay your taxes. The purpose is simple. Payroll tax deductions mean you pay most of your taxes as you go, so that you do not receive a huge bill when it comes time to file your taxes. Most states and some municipalities also levy income taxes and require payroll deductions. If you live in one state and work in another, notify your employer, so that she deducts the correct taxes. If you are self-employed, you do not have an employer who takes taxes out of your paycheck. Instead, you must pay estimated taxes yourself each quarter.
The money your employer takes out of your check is an estimate of how much taxes you owe on your earnings for the pay period. Your earnings determine the size of your payroll tax deductions. Your tax filing status and the number of withholding allowances you claim on your W-4 form also affect your payroll deductions.
Social Security pays for two taxes: retirement and Medicare. These taxes are calculated based on a percentage of your gross pay -- your earnings before any deductions -- and, the percentage varies. For the year 2013, the retirement tax rate is 6.2 percent and the Medicare rate is 1.45 percent. In addition, there is a yearly income cap on the retirement tax. If your year-to-date earnings exceed the cap, your employer stops taking out the retirement tax, but must continue taking out Medicare tax, for which there is no cap.
Your employer calculates and deducts federal income tax based on your taxable income for the pay period. Taxable income is the amount left over after you subtract withholding allowances from your gross pay. For example, in 2012, one withholding allowance equals $73.08 for employees paid weekly. If you claimed two withholding allowances on your W-4, your employer would have subtracted $146.15 from your gross pay to determine your taxable income. You also may have other deductions that reduce your taxable income, such as contributions to tax-deferred retirement plans.
Your Federal Income Tax
The amount your employer deducts from your check for federal income tax is based on a sliding scale, meaning, the more you make, the higher the tax rate. For example, in 2012, suppose you were single and earning $750 per week. No tax would have been deducted from the first $40 you earned. For weekly earnings between $41 and $209, you would have paid 10 percent in taxes. For earnings between $209 to $721, you would have paid 15 percent. In this example, since you earned more than $721 per week, your employer would have deducted 25 percent from the amount over $721, which is $29.
As of publication, the 25 percent tax bracket would have applied to weekly earnings up to $1,688. Wages between $1,688 and $3,477 would have been taxed at 28 percent, and those between $3,477 and $7,510 would have been taxed at 33 percent. If your weekly salary exceeded $7,510, you would have been taxed at a rate of 35 percent.
Many people earn income from investments or a second job and can end up owing the IRS at tax time. To prevent this from happening, consider claiming fewer withholding exemptions even if you are entitled to them. This increases the amount of tax withheld. You also can file a new W-4 form requesting that your employer withhold extra money each payday.