How Much Federal Tax is Taken Out of My Paycheck?
A common question that is asked by new employees is “how much federal tax is taken out of my paycheck.” Everybody always wants to know how much they will be making but know that taxes are always lurking and will impact final take-home pay.
As a small business owner, this could be a question you’re asked by employees, a question you ask yourself, or a question you’re trying to solve for if you’re handling payroll on your own. Below, we provide guidance on what federal taxes are, how to answer this question for your employees, and how to handle payroll and tax calculations.
What Are Federal Taxes?
Federal taxes are the taxes that are withheld from employee paychecks. These taxes fall into two groups: Federal Income Tax (FIT) and Federal Insurance Contributions Act (FICA). Federal Unemployment Tax Act (FUTA) is another type of tax withheld, however, FUTA is paid solely by employers.
For employees, there, unfortunately, isn’t a one-size-fits-all answer to “how much federal tax is taken out of my paycheck.” The amount withheld depends on several factors. However, working with calculators and understanding how payroll taxes work can help give an idea of what take-home pay will look like.
Understanding Federal Income Tax (FIT)
When it comes to FIT, there are a few factors that determine your federal income tax rate:
The filing status you use largely depends on the answer to one question: Were you considered married on the last day of the year? If yes, you are considered married for tax filing that year and if not you are not considered married. There are some special circumstances under which married persons may be viewed as not married. As an example, if they are qualifying for Head of Household status even if not legally separated or divorced. Types of filing statuses include:
- Single Filing Status: to be used by people who are considered unmarried on the last day of the year. If you are single and claiming a dependent, you may be eligible for Head of Household filing status.
- Head of Household Filing Status: If you are unmarried, paid more than half the costs of keeping up a home, and have a Qualifying Person, you may qualify for Head of Household filing status. This filing status provides a higher standard deduction and lower tax rate than the Single filing status. Qualifying for Head of Household requires meeting strict criteria; only certain closely-related dependents will qualify a filer for Head of Household. There are certain circumstances under which a married person may also qualify for Head of Household, for example, if they are claiming a qualifying dependent and have been living separately from their spouse for the final six months of the year or longer.
- Qualifying Widow/Widower with Dependent Child Filing Status: If you are unmarried because your spouse died within the year, you may still file jointly or separately as a married person for that year, regardless of whether you have a dependent. Following the initial year of death, if you remain unmarried and have a dependent child, you can file under the Qualifying Widow/Widower with Dependent Child filing status; this allows you to continue benefiting from the same standard deduction and the same federal tax rates as for married couples filing jointly. This status can be claimed for a total of two years after which, if you remain unmarried, your filing status will need to change to Single or Head of Household, depending on whether you still claim a child dependent. If you remarry following the two-year Qualifying Widow/Widower with Dependent Child Filing Status eligibility period, you should file using one of the married filing statuses.
- Married Filing Jointly Status: As a married person, you may choose to file jointly with or separately from your spouse. A joint tax return combines the incomes and deductions of both spouses. In order to file jointly, both spouses must agree to file a joint return, and both must sign the return prior to filing. Married Filing Jointly offers more federal tax benefits than Married Filing Separately, though there are reasons you might choose the latter over the former.
- Married Filing Separately Status: Married Filing Separately filers receive the least tax benefit but realize separate tax liabilities. It is important to consult an accountant or tax professional to determine which married filing status will provide the best benefit for your specific financial situation. Some reasons a couple may choose to file separately include:
- Only one spouse wants to file taxes.
- One spouse suspects that the information on the joint return might not be correct.
- One spouse doesn't want to be liable for the payment of tax due on the joint return.
- One spouse owes taxes, and the other is due a refund.
- The spouses are separated, but not yet divorced, and want to keep their finances separate.
Amount of Money Earned During the Pay Period
The amount of money you earn during your pay period, when viewed with your filing status, determines your income bracket and associated federal income tax rate. For 2021 tax brackets, visit this page from The Tax Foundation.
Retirement Account Contributions
Your taxes may also be impacted if you contribute a portion of your paycheck to a tax-advantaged retirement savings account. Eligible plan types include traditional IRAs and 401(k)s. Contributions to these plans are considered pre-tax and are therefore exempt from federal income tax during the year in which you make the contribution. It’s important to note that there are limits to the pre-tax contribution amounts. For 2021 the limit is $19,500.
Understanding FICA Taxes
FICA taxes are commonly called “the payroll” tax, however, they don’t include all taxes related to payroll. FICA taxes consist of Social Security and Medicare taxes. These amounts are paid by both employees and employers. For 2021, employees will pay 6.2% in Social Security on the first $142,800 of wages. The Medicare tax rate is 1.45%.
What Small Business Owners Need to Know for Payroll
All of the information above can apply to both business owners and employees. For example, as a small business owner, if you’re asked “how much federal tax is taken out of my paycheck” by employees, you’ll have a better understanding to explain the process. Additionally, if you’re asking this question for your personal paychecks you’ll also know. If you’re one of the small business owners following a DIY approach to payroll, you really need to know the above information.
To handle payroll on your own, make sure that you’re getting Form W-4 from employees during onboarding. Additionally, you’ll want employees to verify their personal information is correct at the end of the year as you’re preparing Form W-2 for tax season. From there, payroll calculators will be your friend. Payroll calculators can help you calculate what payroll will be for salaried employees and contractors.
According to our survey, 71% of small business employees schedule bill payments around their schedule, which helps explain why federal tax withholding amounts will always be a top question asked by employees. With the payroll knowledge and paycheck calculators, you and your employees will be able to at least target the answer to this question.
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This website contains articles posted for informational and educational value. SurePayroll is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, SurePayroll. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant. If you require legal or accounting advice or need other professional assistance, you should always consult your licensed attorney, accountant or other tax professional to discuss your particular facts, circumstances and business needs.