Receiving your first ever payslip is exciting, but seeing taxes taken out of paycheck can ruin this for you. Generally, these tax deductions cause dissatisfaction among employees. However, some of these deductions actually give you enticing benefits. Learn what is the percentage of federal taxes taken out of a paycheck and more in this article.
Understanding Taxes Taken Out of Paycheck
In this article:
- What is a Federal Income Tax Withholding?
- What is a State Income Tax Withholding?
- What FICA Taxes and How Much Do I Need to Pay for This?
- How are These Taxes Being Calculated?
- When Do I Need to File an Income Tax Return?
What is a Federal Income Tax Withholding?
Federal income tax is imposed by the United States Internal Revenue Services on all earnings of U.S. individuals and businesses. It is a standard tax withheld on all forms of income when you operate a business or work for a company in all fifty states of the U.S. The income taxes withheld are the source for all development programs of the government.
What is a State Income Tax Withholding?
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You may get confused between a federal and state income taxes which is crucial especially when you are filing your own taxes. They are separate from each other and unlike federal income tax, state taxes are generally dependent on laws imposed by the State Department of Revenue. This means each state has a different tax system and seven out of the fifty states currently impose no state taxes. These states include Wyoming, Washington, Texas, South Dakota, Nevada, Florida, and Alaska.
What is FICA Taxes and How Much Do I Need to Pay for This?
A short-term for Federal Insurance Contributions Act, FICA taxes serves as social security and Medicare taxes paid by each individual working under a U.S.-registered company. A total of 15.3% (12.4% for social security and 2.9% for Medicare) is applied to an employee’s gross compensation. Both employee and employer shares in paying these taxes each paying 7.65%. For self-employed individuals, they have to pay the full percentage themselves.
How are These Taxes Being Calculated?
If you are employed under a U.S.-registered business, the burden is off your shoulder as your employer will make the computation for you and automatically deducts it on your gross pay. However, if you are a self-employed or a freelancer, you need to make the calculations for yourself. You can use this app to compute your federal tax withholding. For state taxes, you may refer directly to your State Department of Revenue to know the imposed individual tax systems.
When Do I Need to File an Income Tax Return?
All non-exempt taxpayers need to file a federal tax return each year, usually every 15th of April the following year of every taxable year. This return will determine whether you still owe payments to the IRS or entitled for a refund. It will also serve as your document report for all income earned during the taxable year. In case of a state tax return, you are also required to file it on 15th of April or check with your state to make sure.
Do you want to know more information about how FICA taxes work? Watch this video by Khan Academy to know more:
Taxes taken out of paycheck is not the same for every employee. And as frustrating as it can, you must get yourself familiar with these taxes to know where those chunks of your income go. Understanding them can also open your mind that they are not just pure deductions but also benefits you from being a U.S. taxpayer.
Do you think these taxes taken out of paycheck benefits you as a U.S. taxpayer? Share your thoughts with us in the comments section below.