How Much of a Salary Goes to Taxes?

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An employee’s salary is a guaranteed and agreed upon minimum amount of pay that the employee can count on. Salary can be all or part of her pay, but it must be a set amount that she receives each payday, except if a permissible deduction applies. Similar to hourly wages, an employee’s salary is subject to income tax and federal payroll tax withholding.

Salary Determination

To arrive at the employee’s salary each pay date, the employer divides his annual salary by the amount of yearly pay periods, such as 26 biweekly pay periods or 12 monthly pay periods. The result is the amount that’s subject to taxation, unless a qualifying pretax deduction applies. For example, if the employee has a Section 125 dental plan, the employer subtracts the benefit from his gross salary before withholding federal income tax, Medicare tax, Social Security tax, and if applicable, state and/or local income tax. Otherwise, the employee’s entire gross salary is subject to taxation.

Federal Amounts

To help determine the amount of federal income tax that should be withheld from an employee’s salary, the employer obtains her filing status and allowances from lines 3 and 5 of her W-4 form. Then it uses the IRS Circular E withholding tax table that corresponds to the employee’s filing status, allowances, pay period and salary to figure out the withholding. The employer calculates Social Security tax at a rate of 4.2 percent as 2011 of the employee’s taxable salary, up to the yearly wage maximum of $106,800, and Medicare tax at 1.45 percent of taxable salary.

State Calculations

Most states charge a state income tax on wages and salaries. The state taxing authority may require the employer to use a system similar to federal income tax withholding, except that it uses the employee’s state withholding allowance or exemption certificate and the state withholding tax tables. Some states allow the employer to use the employee’s W-4 and the state withholding tax tables to calculate state income tax; others require a flat withholding percentage, such as Pennsylvania’s 3.07 percent of gross salary, as of 2011.

If the state requires state disability insurance withholding, the employer withholds it according to state policy. For example, as of 2011, a California employer withholds state disability insurance at 1.2 percent of taxable salary, up to $93,316 for the year.

Considerations

If the city or local government imposes city or local income tax, the employer calculates them according to their requirements. For example, for New York City income tax, it uses the employee’s IT-2104 form and Publication NYS-50-T to figure the withholding.

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