You may notice the different federal taxes that come out of your paycheck but have no idea how they're calculated. The U.S. Congress establishes federal employment taxes, including income taxes, Social Security tax and Medicare tax. The latter two are called FICA taxes; they go hand in hand. Income tax is a standalone tax with its own set of rules. Employees pay federal taxes through withholding, and self-employed people pay their own taxes.
Income Tax Calculation
Your employer takes federal income tax from your paycheck based on your Form W-4 and Internal Revenue Service Circular E. Your employer uses the Circular E tax table that matches your wages and pay period, along with the allowances and filing status you indicate on your W-4. Self-employed people who do not pay federal income tax through withholding or employees who don't have enough tax withheld may have to pay estimated tax. This is especially true if they receive income in the form of interest, dividends, rent, royalties and capital gains. Self-employed people use the worksheets in IRS Publication 1040-ES to figure their estimated tax, which is due quarterly.
As of 2018, your employer takes Social Security tax at 6.2 percent of your wages, up to $128,400 for the year, and Medicare tax at 1.45 percent. Your employer pays Social Security tax at 6.2 percent of wages, up to $128,400 for the year, and Medicare tax at 1.45 percent. It pays all of your federal withholding taxes and its own part of FICA to the IRS, typically semiweekly or monthly. Self-employed people pay the entire amount of 12.4 percent of earnings for Social Security tax, up to $128,400 for the year, and Medicare tax at 2.9 percent. However, the IRS allows these workers to deduct half of their total FICA tax when they file their federal tax return on Form 1040.
Video of the Day
Brought to you by
Related pageshow to calculate interest expense on bonds tummy tuck health insurance chase activate 5 percent cash back how much will paying off collections raise credit score vanilla visa gift card customer service phone number are utilities included in condo fees tdvisa eviction process georgia reissue treasury stock how to file tax return without w2 tax software for tax professionals comparison do post office money orders expire investment interest expense deduction arapahoe community college scholarships bloomberg volatility calculation ohio survivorship deed how can i get a copy of immunization records lease buyout agreement where to donate toys in nj dentist that accept united healthcare gross up net pay calculator medicare weight loss programs percent down to avoid pmi check mass tax refund status usda loans with bad credit addressing an envelope attn roth ira maximums gnma securities carelink san antonio 1040ezform scholarships for ex offenders no federal taxes withheld from paycheck social security tax withholding calculator buy eurobonds financial aid special circumstances letter sample w4 married vs single self employed mileage expenses 529 plan early withdrawal att add money financial assistance for widows fafsa income requirements what is a dda account withdraw cash from atm without card prorate definition too many accounts with balances how to update dd214 after discharge redeeming series ee bonds swiss bank account advantages car loan interest deductible income tax return why is my debit card declined coop house insurance burial benefits social security depreciation of rental property calculator amscot money order trace amortized vs depreciation can you file jointly if you are not married arkansas statute of limitations how to write post dated cheques bursary letter sample t7dr a form statute of limitations credit card debt ohio banana republic credit card phone dyslexia scholarships equation of gross profit stock quotes provided by msn money state of indiana tax refund status nc treasurer retirement negative equity car lease salary expense journal entry preapproved credit card offer ap classes for college credit defensive stocks list preapproved credit card calculate hpr pay for delete letter original creditor how to apply for an abandoned vehicle title
Your federal income tax withholding goes toward national programs such as defense, interest on national debt, foreign affairs and law enforcement. Your Social Security withholding provides benefits for the disabled and their dependents as well as retirees and their dependents. Your Medicare withholding pays medical and hospital insurance to eligible people when they reach age 65.
The IRS is the sole administrator of federal income tax, but it splits the responsibility for FICA taxes with the Social Security Administration. Taxpayers file their federal tax return with the IRS, but employers must file annual W-2 forms with the SSA to report taxes withheld so their employees get credit for future benefits.
The story behind federal withholding goes way back. In 1943, the Current Tax Payment Act gave the government the right to collect taxes on wages via withholding, according to an article published in "The Cato Journal." Withholding allows the government to fund the country's welfare system. Social Security came into existence in August 1935 when President Franklin D. Roosevelt signed the Social Security Act. The first taxes were collected in January 1937. When the Social Security Act was amended in 1939, the taxing rules were taken out of this law and put under the Internal Revenue Code, then renamed the Federal Insurance Contributions Act. Medicare, which was passed into law in July 1965, makes up the other half of FICA.