How much federal tax is withheld?
When you start a job, you are required to fill out and return a W-4 to your employer. This will have your filing status and allowances recorded for the payroll process. Your employer uses this form to select the correct tax table to use when calculating your federal tax liability.
Allowances
Allowances are the dependents that you are going to claim on your end-of-the-year income taxes. If you claim more allowances than what you claim on your tax return, you could owe money to the Internal Revenue Service (IRS) for underpayment of federal taxes. You can claim as many dependents as you qualify to claim to reduce the amount of federal tax taken from your pay, or enter "zero" for no dependents (allowances) to have more federal tax deducted from your pay.
Pretax Deductions
If you have a 401k or any other pretax deductions, these are subtracted from your gross income before the federal tax is calculated. You do not pay federal taxes on pretax income. For instance, if your gross pay is $400, and you put $25 each payday into a 401k, your federal tax liability would be on your adjusted gross income of $375 (400 minus 25 equals 375).
Federal Tax Tables
Employers use IRS Publication 15 to determine your tax liability. Tables are broken down by your marital status, your payroll periods (i.e., weekly, biweekly, semimonthly, monthly, etc.) and by the number of allowances you are claiming on your W-4. Your employer will take your adjusted gross pay and match it to the tax table to find the amount of federal income tax to withhold from your paycheck.
Percentage
Some employers use the percentage rate, which is also found in IRS Publication 15, to figure the federal tax withholding. This is usually done when using an automatic payroll system. The percentage rate starts are 10 percent for gross income, and the gross income amounts vary for married and single persons, as well as the payroll period.
Exempt from Taxes
If you claim tax exempt on your W-4, your employer will not deduct any federal tax from your gross income. This is a bad idea for anyone who does not deserve or is not entitled to claim exempt status. You may only file exempt status if you received a refund of all federal income tax you paid in the previous year due to zero tax liability, and if you anticipate that you will have no federal tax liability and a complete refund in the current year. If you file exempt in error, you will end up owing money to the IRS at tax time, as well as possible penalties, in most cases.
Tags: from your, gross income, federal liability, your gross, adjusted gross