I was confused and upset. Then, I became upset that I was confused! I was certain my employer was cutting corners or at the very least, not understanding my situation. It was my first job, I was sixteen years old, and I was earning $4,000 a year working the concession stand at the local movie theatre. I had clearly written “tax-exempt” on my W4, but there were still taxes coming out of my check.
When I told my manager, he said that was just the way of things. There was no avoiding paying those taxes. I hated it. I was being robbed blind and no one cared! Or at least, that’s how it felt. I would have loved for someone to walk me through all that was happening on my check. I would have saved myself a lot of anger and suspicion if I had just known what I do now.
If you or one of your employees is wondering about what they are seeing on their check, this blog takes a closer at how the taxes are calculated. Let’s check it out…
THE DIFFERENT TAXES
There are three different tax categories that come out of your check each pay date: Social Security and Medicare (sometimes called FICA), Federal Withholding, and State and Local withholding. The tax liability for each category is calculated differently, and if you don’t know how each one works, the amounts you see can be confusing. Let’s take a closer look at each category.
SOCIAL SECURTY AND MEDICARE (FICA)
Social Security and Medicare are what make tax a certainty in this country, supplying the healthcare and retirement benefits for our aging American population. They don’t care how little money you earn; they take the same percentage of your check regardless of if it’s $1 or $100,000. Social Security withholds 6.2% of the gross wage for each check, and Medicare takes 1.45% of the gross wage. Together, that adds up to a total of 7.65% of your gross wage. Once your total wages for a year exceed $160,200, Social Security no longer withholds anything from your check. This means that once you have paid $9,932.40 towards Social Security, you will not pay another cent towards it for the rest of that calendar year. Medicare does not have a limit, so you will always pay at least 1.45% of your check to cover Medicare tax withholding.
The second kind of tax to look at is federal tax withholding, and it’s important to know how your W4 could affect the withholding amount. When you fill out your W4 during the onboarding process, you are providing information for your employer to use to calculate your federal withholding. The calculation has several steps to it, but it is mostly based on your filing status, your projected annualized income (from all reported sources), and the number of dependents you have. The thing to note here is that the W4 only affects your Federal Withholding. Putting Exempt on a W4 prevents Federal Withholding from coming out, but not FICA or Local taxes. If you want to have the most amount possible taken out of your check, you could put single with no dependents, even if you plan to file Married filing jointly with several dependents. The end result would be a large return at the end of the year when you file your taxes. Alternatively, when you fill out your W4 most accurately, your Federal Taxes will likely be covered but you won’t receive much (if any) return. Talk with your tax preparer to learn the best way for you to fill out your W4 to ensure the outcome you want to see when you file your taxes.
Now, let’s discuss how those Federal Taxes are actually calculated. Knowing how it works can help you, or your employees, understand why you are seeing the various withholdings on your paystub. For 2023, the standard deduction for federal withholding for people filing as “single” or “married, filing separately” is $13,850. If you are married and filing jointly, the standard deduction is $27,700, or if you are filing as the Head of Household, it is $20,800. The more dependents you have, the greater your deduction becomes. Generally speaking, you subtract the total amount of deduction from your annual income and use whatever remains to calculate your tax liability. Since you don’t know your exact wages earned in a year until the year is over, the wage on each check is annualized based on how often you get paid. For example, if you get paid once a month and your wages are $500 on a check, the calculation says you will earn $6,000 a year. Since that amount is under the standard deduction, no federal withholding will be taken. If the next check your wages are $5,000, the calculation will say you are earning $60,000 a year, and you will see a withholding that accommodates that amount of annual income. Because your filing status can change throughout the year, your year-to-date wages are not taken into consideration. Fortunately, if you outsource your payroll, the payroll software handles all of the math for you.
STATE AND LOCAL
Finally, the last tax that you will see on your check stub are the State and Local taxes. Each state has their own rules for how they calculate tax withholding, and depending on where you live, there may be city or county taxes, or even a school district tax. Each will either have their own form (similar to a W4) that you need to fill out or will be a flat rate like the FICA taxes. In California you can pay up to 13% of your gross wages on state and local taxes, and that does not include the 7.65% from FICA or anything being withheld from Federal withholding. There is too much variance from state to state to go over each local tax, but if you would like to see which states have additional tax withholding, you can see a list here. Thankfully, we can all breathe a little lighter knowing that we are not In California. And if you are in California, you are welcome here anytime.
At Whirks, we always aim to simplify the complicated for our clients. Want some more resources? Check out this article about How to Avoid Direct Deposit Scams.