With every paycheck, your employer withholds some of your earnings for taxes. If too much is withheld, it’s true that you will receive a refund, but when you really think about it, by waiting until tax season to claim that money back, you’ve essentially provided the IRS with an interest-free loan during the year. On the other hand, if you owe taxes when you file your return, you may have to scramble to pay what’s due, and you could also owe interest and penalties to the IRS if you don’t have enough withheld throughout the year. Show The IRS has a “pay as you earn” policy, meaning that as you earn money throughout the year, the IRS expects that you’ll send them what you believe to be your best estimate of what the taxes are on that income. Your employer helps with this calculation and sends it on your behalf, but they use information you provide them to best estimate for you. The ideal way to handle your tax withholding is to have just enough taxes withheld to prevent you from incurring penalties when your tax return is due, but still owe just a little bit rather than receive a refund. Yes, you’ll have to make sure you have a little set aside to make that payment in April each year, but in the meantime, you get to enjoy all of the money you earn throughout the year rather than waiting for the IRS to return it to you upon filing your return. When you have a W-2 based job, the best way to find that perfect balance of withholdings is to properly complete Form W-4 (and its accompanying worksheets) when you begin a job, and providing an updated Form W-4 to your employer when your circumstances change. Using Form W-4 to choose the proper withholding amountTwo factors determine how much income tax your employer withholds from your regular pay: how much you earn and the information you provide on Form W-4. This form asks you for three pieces of information:
When you need to update your W-4To avoid surprises at tax time, it's a good idea to periodically check your withholding. Otherwise, there are some key life changes that definitely warrant an update. Those include:
If you find that you need to make changes to your withholding, you can do so at any time simply by submitting a new Form W-4 to your employer. To check on your withholding amount and to see whether you need to make changes to your W-4, the IRS has a comprehensive Withholding Calculator on their website. You'll need your most recent paystub as well as last year's tax return. You won't need to enter any personally identifiable information that ties the numbers you enter to you, but the more accurate the numbers you use, the more effective the calculator will be. Check it out here. If the form looks different than you remember, it probably isDue to the tax changes that were implemented in 2017, the IRS issued an updated Form W-4 that helps you account for the changes in an easier way. For example, your tax withholding is no longer calculated based on the number of allowances, but instead on the factors listed above. If it’s been a while since you’ve updated your form and you haven’t switched jobs, it’s not a bad idea to take a look and see if you need to submit a new form to your payroll department. It can help ensure you’re having the ideal amount withheld, so you can avoid big tax surprises in the future. This article, 'What You Need to Know About the New W-4 Form' has more information on the new form. What percentage of federal taxes are taken out of a paycheck?The 2023 Income Tax Brackets
The 2023 tax year will have the same seven federal tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Your filing status and taxable income, including wages, will determine the bracket you're in.
How is federal withholding calculated on my paycheck?Employer Pays
Withhold half of the total 15.3% (7.65% = 6.2% for Social Security plus 1.45% for Medicare) from the employee's paycheck. The other half of FICA taxes is owed by you, the employer. For a hypothetical employee, with $1,500 in weekly pay, the calculation is $1,500 x 7.65% (. 0765) for a total of $114.75.
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