Things You Need To Know About Tax Withholding
An employer deducts/withholds a certain amount of salary from the employee as income tax; the same amount would be deducted from the Paycheck and remits the same to the state, federal, or local tax administration. This amount which has been deducted or withheld is termed as Tax withholding as this amount doesn’t reflect on your Paycheck. This is one way rewarding as the employee need not pay heavy sums while filing in their annual tax returns.
- The amount of money to be deducted is decided by the employers based on Form W4 which has information such as marital status and the number of dependents on the employee.
- The employer may end up owing a huge sum at the end of the year if he does not withhold enough tax.
Working of Tax Withholding
If you are an employee, earning an income in the US, then you are bound to pay Income tax. This income tax you pay goes to the Federal Government and some other state governments. This tax they collect is used for the welfare of the country like improving the well being and the living conditions of its residents.
According to the Tax authorities, it’s the responsibility of the employers to withhold the tax from its employees by deducting it from their paychecks, to guarantee that all the residents who are working in the U.S. are remitting taxes regularly. All these taxes accrued by the employers are remitted with the Internal Revenue Service (IRS) on behalf of the employees who are earning wages.
Federal Tax Withheld:
Fed Tax, FT, or FWT are some of the short forms of Federal income tax. It is termed as the amount that is remitted with the federal government. So this works a credit against any tax a person pays to the federal government. Similarly when an individual file his returns this amount from Federal tax withheld would be given as a credit. The deciding factor for the amount withheld from the pay is dependent on:
- The marital status of a person
- The number of allowances already claimed on the Form W-4 which is filed with the employer of a concerned company
People, who are married, have the advantage to withhold at the higher single rate
Tax Withheld With State & Local Authorities:
St Tax, ST, or SWT are some of the short forms of State income tax. You may notice this on your pay check at times; it shows the abbreviation of the state next to the tax, for which it is being withheld. (Ex: MA tax).
It is also possible that depending on the state you live in, you might:
- Live in a state where there is no state holding
- Have withholding for more than one state — the state you live in and the state(s) you work in
The wages you earn inside a county, city, and school boundaries will attract Local income Tax, which would be withheld from the wages. Residing in an area that charges you an amount of tax, then the deductions from the wages would be made according to the jurisdiction of that place.
Medicare Tax and Social Security Withheld:
The short forms OASDI, SSWT, FICA, or SS belong to the Social security task. This is one of the inevitable withheld. One should have this even though it is true that he/she may not have anything that is withheld for state, federal and local Income taxes.
For getting Social Security benefits one has to earn a specified amount as wages for a time period which is not less than 40 quarters, then they become eligible to get the Social Security benefits when they retire. 6.2% of the gross income is withheld by every employer which is for the Social Security up to an income of $1427,000 for the year 2022. The same percentage 6.2% should be contributed by the employer as well which is not deducted from the employees’ wages.
Medicare Tax Withheld or Med might be the short form of Medicare tax. To provide Medicare when someone reaches the age of 65, this amount is withheld from their wages. Not just any amount but 1.45% of gross income is remitted towards the same. An additional value of 1.45% of the gross income is contributed from the employer’s side, which is not deducted from the pay check. All the covered wages are subject to Medicare tax as there are no income limits on Medicare tax.
There has been an amendment for those earning more than $200,000. Starting from the year 2013, the employers are instructed to withhold an additional 0.9% (a total of 2.35%) of Medicare tax on the total wages earned by an employee.
Even retirement accounts can be subjected to withholding. For contributing towards a retirement account, one can either contribute it before the tax deductions from the paycheck or after the tax deductions from the paycheck. Taxes have to be paid on the money that is contributed towards the account, and if the said tax is not paid, then the taxes would be withheld from the account when someone withdraws the funds.
The best example for this is a Traditional IRA account holder, who is exempted from paying capital gain tax on any kind of growth that incurs within their account. But, this is not applicable for withdrawals after retirement; some part of the amount is withheld towards income tax. If you make a withdrawal from the 401k plan in that case taxes will be withheld both from the earnings portion as well as the original contribution.
Form W-4
IRS Form W-4 has to be filled by an employee who starts a new job; this is something the employer provides him. The employee should answer the questionnaire in the form of integrity and honesty. The employee should also make it velar whether he holds a single job or multiple jobs. In the case of multiple jobs, the employee should declare how much is his remuneration from different jobs.
It also expected from the employee to disclose their marital status. If a person is married, he has to disclose about the employment status of spouse and their earnings on the Form W-4.
Apart from this, the employee should also state whether he has any dependents and is he filing in the form as the head of the family, in the form. It is the employer who fills out the rest of the information in the form.
The main purpose of Form W-4 is to inform the employee about how much money has been withheld by the employer as income tax. The amount of money to be withheld from the wages of the employee is a call taken by the employer, based on the factors of the form and also check if the employee wants an additional amount withheld. There can be changes in the life of an employee, a new beginning in life marriage, welcoming a new life, taking up a new responsibility, getting divorced, additional dependent, any of this change would require the employee to fill new W-4.
New information provided is used by the employer to re-evaluate what is the right amount of income to withhold for the sake of taxes from the paycheck.
There are chances that a person could be paying more or less than the mandated amount because of inaccurate tax withheld. If the amount is said to be more than the required amount then the excess amount would be sent as a tax refund by the IRS. On the other hand, employees who did not pay enough tax would be subject to penalties and interest on the same.
If you are a self-employed person then you don’t have withholding amounts but you are supposed to pay the tax estimated for a quarter. All the income accrued from dividends, capital gains, interest or royalties’, should be is subjected to tax and the estimated tax payments have to be made.