In this lesson, you’ll learn about how you determine how much money is withheld from your paycheck throughout the year to pay your taxes. There will be a short quiz at the end of this lesson to make sure you understand the material before moving onto the next lesson.
If you are an employee, your employer probably withholds some of your paycheck to pay federal, state, and sometimes local taxes.
FICA, also known as Social Security and Medicare taxes
In 2022, for those of us who make less than $147,000 per year, 7.65 percent of our paychecks is withheld for FICA, or Federal Insurance Contribution Act, taxes. FICA taxes are used to fund Social Security and Medicare programs which many of us take advantage of at some points in our lives. SSDI, for example, may be used by a blind person to help support themselves or their families during an extended job loss. Medicare may also be used by a blind person to cover some health costs during an extended job loss or during retirement. Social Security retirement benefits are designed to replace around 40 percent of a person’s income when they retire, making Social Security an important part of many retirement plans.
Federal Income Tax
In 2022, between 10 percent and 37 percent of our paychecks is withheld for federal income taxes. These taxes fund many federal programs including the military, the federal highway system, and some of the educational and rehabilitation programs that many of us take advantage of at various points in our lives.
You determine how much your employer withholds from your paycheck for federal income taxes by telling your employer about yourself and the people you take care of including:
- Or other living ancestors E.g. great grandparents
- Or your spouse’s parents
- Brothers or Sisters
- Or your spouse’s brothers or sisters
- Or children of your or your spouse’s brothers or sisters
When you start working, your employer will ask you to provide this information by filling out IRS form W4. Some employers offer an online form, while others only offer a paper form. If your employer doesn’t offer an accessible form, your employer’s human resources department will assist you to fill out the form, but they may not be able to assist you to figure out who you can claim as a dependent. You can use the IRS’s Interactive Tax Assistant to help you determine how many dependents you can claim before beginning to fill out your W4 form.
Employers are required to withhold less for employees who support larger families, so its important to make sure you submit the correct information. You can also submit a ne W4 form anytime the size of your family changes.
State And Local Taxes
The state, county, or city you live in may also require your employer to withhold state and local taxes, though not all states do. These taxes may be used to fund a variety of programs within your state, county, or city including Roads, schools, public assistance programs for individuals and businesses, and some of the educational and rehabilitation programs that many of us take advantage of at various points in our lives. It’s important to understand how the place you live impacts your take home pay.
Some states require your employer to withhold state income taxes using the information you provide on your W4 form. Other states may require your employer to collect information from you using a state-specific form. If your employer doesn’t offer an accessible form, your employer’s human resources department will assist you to fill out the form, but they may not be able to assist you to figure out who you can claim as a dependent. In many cases, you can use the IRS’s Interactive Tax Assistant to help you determine how many dependents you can claim before beginning to fill out your state-specific form, but it’s important to check with your state’s department of revenue to learn whether there are any important differences in your state’s tax laws that you’ll need to take into account.
Taxes may also be withheld from other sources of income including:
- gambling winnings
- Interest income
- Dividend income
- Social Security Income
You determine whether anything is withheld from these income sources, so it’s important to make sure you’ve withheld the correct amount to avoid owing a very large tax bill at the end of the year.