What Is the Calculation for Federal Taxes to Come Out for Your Annual Earnings?
They say nothing is certain except death and taxes, and that certainly seems to be the case. Workers are subject to a myriad of taxes from Federal taxes and payroll taxes to state and local levies. Making sense of all these taxes can be quite a challenge, but it is important to understand how these obligations work.
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Medicare Tax
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The Medicare program that provides medical care for senior citizens and the disabled is funded by a payroll tax that is shared between the employee and the worker. As of 2011, workers are required to pay 1.45 percent of their wages into the Medicare system, with the employer paying the other 1.45 percent of the levy.
Social Security Tax
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The Social Security tax is designed to support senior citizens and the disabled, and it takes the form of a payroll tax. As of 2011, the employee's Social Security tax rate is 4.2 percent of the first $106,800 in earnings. Earnings above that cap are currently exempt from Social Security taxes. After 2011, the tax rate for Social Security goes back to 6.2 percent. The temporary reduction was part of a tax compromise deal hammered out by President Obama and the Republican controlled Congress late in 2010.
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Self-Employment Tax
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When you work for someone else, you pay half of the Social Security and Medicare tax, and your employer picks up the rest. But if you work as an independent contractor or are self-employed, you must pay both the employer and the employee's part of both taxes. That means that you pay 4.2 or 6.2 percent of your income toward Social Security as the employee, plus another 6.2 percent as the employer. You also pay a total of 2.9 percent in Medicare taxes, which represents both the employer and the employee's share of the tax. This combined tax is known as the self-employment tax.
Federal Income Tax
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Unlike Social Security and Medicare taxes, which use a flat rate regardless of income level, federal income taxes are progressive. That means that workers who make a higher salary are required to pay a larger percentage of their earnings in taxes. As of 2011, the income tax brackets start at 10 percent for the workers with the lowest incomes and top out at 35 percent for the workers with the highest incomes.
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References
- Photo Credit Form 1040 Tax Forms image by Viola Joyner from Fotolia.com
