Income taxes are top of mind right now, as we've all completed (or, are hopefully close to completing) the task of filing our returns to the IRS.
In a perfect world, you would never have to pay taxes on the money you earn. Instead, every dollar would end up in your bank account. However, as you know, this isn't the way things work. Instead, a variety of taxes are deducted from each paycheck.
While it's important to understand each and every tax and deduction, remember this: federal tax typically accounts for the largest chunk.
What Percentage do I Pay?
Many people are under the impression that what they pay in federal income tax is nothing more than a basic calculation, such as a certain percentage of their gross pay. This is not exactly true. Instead, there are a variety of factors that impact the calculation of your federal income taxes. These include:
Number of withholding allowances
Amount of money earned during the pay period
Retirement account contributions
Take for instance the number of allowances you claim on line 5 of your W-4. This one number will go a long way in determining how much federal tax is taken out of your paycheck.
Here's what you need to know: the fewer allowances you claim, the more your employer will withhold in federal income tax from your paycheck. Conversely, the more allowances you claim the higher your take home pay.
As you can see, there are many factors that determine how much federal tax is withheld from each paycheck. For this reason, the best thing you can do is review your next paycheck in great detail. Upon doing so, you'll gain a better understanding of what you're paying, how much you're paying, and if there's anything you can do to change your situation.
Figure it out with an online payroll calculator
We have some free payroll calculators you can use to calculate the impact of taxes on your take-home pay. Employers can use these too, but it's a time consuming endeavor. Pro tip: if you're doing your payroll taxes yourself and it's turning into a time suck, let us help you out. Get a free quote on how much it would cost to hand over the task of doing your payroll, including guaranteed tax filing, right here.