What Taxes Should Be Withheld From Your Paycheck?
The Current Tax Payment Act of 1943 gave the United States government the power to legally collect a federal income tax from wage earners via the withholding system. Employers withhold federal income taxes plus federal payroll taxes and, if required, state employment taxes from paychecks.
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Social Security Tax
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The Social Security systemc provides benefits to qualified retirees and their dependents as well as eligible disabled individuals and their dependents. In 2011, employers withhold Social Security taxes at 4.2 percent of taxable gross wages, up to $106,800 per year. Taxable gross wages are an employee's earnings after nontaxable deductions, such as a 401(k), are withheld from the gross pay.
Medicare Tax
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The Medicare system provides hospital benefits to qualified individuals who reach age 65. The Federal Insurance Contributions Act requires the collection of both Medicare and Social Security taxes. In 2011, employers withhold Medicare tax at 1.45 percent of all taxable gross wages --- it has no annual wage limit.
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Federal Income Tax
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Federal income tax is used to fund the national welfare system plus law enforcement, defense, foreign affairs and community development. Your employer uses your filing status and allowances (stated on your W-4 form) and the IRS Circular E withholding tax table that corresponds to your filing status, allowances, pay period and wages to figure federal income tax. You do not pay federal income tax if you meet the exempt criteria included on your W-4 form. Your employer pays your Medicare tax, Social Security tax and federal income tax withholding, usually semiweekly or monthly, to the Internal Revenue Service.
Possible Additional Withholding
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You must pay state income tax if you do not work in Florida, Alaska, Nevada, New Hampshire, Texas, South Dakota, Wyoming, Tennessee or Washington. Your employer withholds it according to the rules of your state revenue agency. If you live in a certain city, such as New York City or Yonkers, you must pay city income tax. Some local governments, such as in Pennsylvania and Ohio, charge local income tax. In rare cases, such as in California, you may be required to pay state disability insurance.
State, city and local income taxes provide for various programs, such as public heath, transportation, education, correctional and rehabilitative services. State disability insurance provides temporary financial aid to employees who sustain off-the-job illnesses or injuries.
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References
- Money-Zine: FICA Tax
- IRS: Understanding Taxes
- California Employment Development Department:: Rates, Withholding Schedules, and Meals and Lodging Values
- IRS: States Without a State Income Tax
- The Cato Journal: The Evolution of Federal Income Tax Withholding: The Machinery of Institutional Change
- New York State Department of Taxation and Finance: Withholding Tax Forms 2010/2011 - Current Period
