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Payroll Taxes and Federal Income Tax Withholding

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Sharon Smith

on 9 September 2013

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Transcript of Payroll Taxes and Federal Income Tax Withholding

Payroll Taxes and Federal Income Tax Withholding
The Basics
Employers withhold payroll taxes and income tax from employees' pay.

Employers send the amounts withheld to the federal government.

Employees complete Form W-4.

Employers use Form W-4 to determine how much income tax to withhold from employee pay.

Social Security Tax
is also called the FICA (Federal Insurance Contributions Act) tax.

Social Security taxes provide the following benefits for employees and their dependents:

retirement benefits
benefits for the dependents of retired workers
benefits for the disabled and their dependents

Medicare Tax
is used to provide medical benefits for certain individuals when they reach age 65. Workers, retired workers, and the spouses of workers and retired workers are eligible to receive Medicare benefits upon reaching age 65.

Federal income taxes finance:

national defense, veterans, and foreign affairs
social programs
physical, human, and community development
law enforcement
interest on the national debt

withhold taxes from employees' pay.

Gross pay is the amount the employee earns.
Net pay, or take-home pay, is the amount the employee receives after deductions.

The difference between gross pay and net pay is:

Social Security taxes
Medicare taxes
income tax withheld
other amounts withheld

Employers send the withheld taxes to the taxing authorities.
Payroll Taxes
Payroll Tax Rates
Social Security tax rate 6.20%
Medicare tax rate 1.45%
Total payroll taxes 7.65%
Tax Tip
There is a maximum annual amount of Social Security tax withheld per employee. Social Security taxes are not withheld on amounts over the earnings limit. For 2011, the earnings limit was $106,800, and the maximum Social Security tax was $4,485.60 ($106,800 x 4.2%). There is no limit on the amount of wages subject to Medicare tax.
If an employee earns $1,000, the payroll taxes are:
Social Security tax $62.00
Medicare tax $14.50
Total payroll taxes $76.50
Employee's Withholding Allowance Certificate to determine how much federal income tax to withhold.

The amount of federal income tax withholding depends on

the employee's marital status,
the number of withholding allowances claimed by the employee,
any additional amount the employee wants to withhold, and
any exemptions from withholding that the employee claims.

Filing Status
The filing status determines the rate at which income is taxed.

The five filing statuses are:

married filing jointly
married filing separately
head of household
qualifying widow(er) with dependent child

Some taxpayers can qualify for more than one filing status. Usually, taxpayers choose the filing status that results in the lowest tax.
Single Filing Status
Taxpayers use the single filing status if, on the last day of the year, they

were never married,
were legally separated under a decree of divorce or separate maintenance, or
were widowed before January 1 of that year, were not remarried and have no dependents.

Married filing joint
This includes:

taxpayers who live together in a common-law marriage recognized by the state where the marriage began
Common-law states: Alabama, Colorado, District of Columbia, Iowa, Kansas, Montana, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Texas
taxpayers who live apart but are not legally separated
taxpayers whose spouses died during the year and who have not remarried

Both husband and wife must sign the income tax return. Special rules apply when a spouse cannot sign the tax return because of death, illness, or absence.

Both husband and wife are responsible for any tax owed.

The lowest tax rates apply to the married filing jointly filing status.
Head of Household
Tax rates for head of household are lower than those for single taxpayers.

In general, taxpayers use head of household filing status if they

are unmarried or considered unmarried as of the end of the year, and
provide more than half the cost of keeping up a home for a qualified person for more than half of the year. (Dependent parents do not have to live with taxpayer.)

Keeping up a home includes rent, mortgage interest, taxes, insurance, repairs, utilities, paying for domestic help, and food eaten in the home.
Five Filing Statuses
The five filing statuses are listed in order of lowest to highest tax rates:

married filing jointly
qualifying widow(er) with dependent child
(Married filing jointly filing status and qualifying widow(er) with dependent child filing status have the same tax rates.)
head of household
married filing separately

Things to Remember
You can have more than the maximum withheld from your pay
Different tax rates are associated with filing status
Gross income consists of all reported income from any source
You can take either the standard deduction or itemized deduction
Full transcript