The federal government requires employers to withhold taxes from employees earning a regular salary. The system of "pay as you go" taxation is supposed to ensure that an accurate amount of money is remitted to the government as you earn the money; this way, you don't get hit with a huge tax bill when you file a return. In addition, payroll taxes contribute a portion of your salary to the Social Security and Medicare systems.
Income Tax Withholding
Your employer withholds a portion of your salary every time he prepares your paycheck. The amount of income tax withholding depends on the number of allowances you claimed on your W4 form. If you claim zero allowances, none of your salary is sheltered -- all of your pay is subject to withholding at the proper rate, depending on your filing status. Each allowance shelters $3,950, so a maximum of 10 allowances will shelter $39,500. You may request no withholding if you don't expect to owe any taxes at all.
Employer Tax Payments
When the employer withholds income tax, he declares and pays the amount to the IRS, which keeps track of the amount of money that's been withheld on your account. These withholding payments are strictly regulated and enforced; if the employer fails to transfer the funds he's taken out of your pay, he'll soon have a very troublesome issue with the IRS. When you file a tax return, you submit a copy of the W2 to the IRS. If the withholding amount on the form and in your account does not match, the agency will come back with a letter and, possibly, a bill for the adjusted amount of tax you owe.
Payroll taxes are another form of withholding required of your employer according to federal law. Your wages are subject to Social Security and Medicare tax. The Social Security tax is 12.4% of your salary, up to $117,000, paid in equal portions by you and by the employer. Medicare tax is 2.9%, also divided equally. If you are self-employed and don't have money withheld from a paycheck, you must pay quarterly estimated taxes and self-employment tax to pay both portions of the payroll tax.
W4s and State Tax
Employers also withhold money for state income tax, if your state has one. Some states, such as New York, have a separate withholding certificate to be filled out by the employee. Others rely on the W4, and the employer shelters income from state tax in the same way, although he withholds at a different rate.
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