If you base your budget on your take-home pay, a sudden change in your federal withholding can throw a wrench in your financial plans. Although knowing the reason for the change in withholding might not make you happy, you can at least rest assured your employer's not siphoning off extra from your wages.
Your federal withholding can increase for a variety of reasons, including receiving a raise. Submitting a new W-4 to your employer may also affect your tax withholding levels.
Income Tax and Your Withholding
Your tax withholding is designed to mirror your estimated federal tax liability. When income tax rates increase, your tax withholding will likely respond accordingly. Conversely, when income tax rates decrease, your withholding should shrink. For example, according to 2018 tax rates, the top tax bracket is now 37% percent for individuals earning over $500,000 or joint filers with over $600,000 of taxable income. This is a decrease of 2.6% compared to 2017. If you fit within this tax bracket, you should plan on seeing a reduced tax withholding.
Increased Employment Taxes
Though the Social Security and Medicare tax have been relatively stable, at least compared with income tax rates, they're not set in stone. When these rates increase, so does your withholding, even if you're still making the same salary. For example, in 2011 and 2012, the employee portion of the Social Security tax dropped from 4.2 percent to 6.2 percent. When it returned to 6.2 percent in January 2013, more money was withheld from employees' wages. If you make $50,000 a year, you will see a total of $1,000 less in your paychecks over the course of the year. In 2o18, this rate has remained in check with 2013 rates, sitting at a firm 6.2 percent.
Changing Your W-4
If you submitted a new W-4 to your employer, the changes could cause your tax withholding to go up. For example, each personal allowance you claim on the form lowers your income subject to withholding. So, if you had a child leave the nest, that's one less allowance. In addition, if you switch your filing status from married to single, such as if you get a divorce, your withholding rate will go up too. You can always ask your employer to withhold extra to cover taxes on other income that isn't subject to withholding, like interest or dividends.
Getting a Raise
Even if tax rates haven't changed, your withholding might go up when you get a raise. The federal income tax is a progressive tax, which means that as you earn more, you pay a higher rate. For example, in your 2018 tax return you paid only 10 percent on the first $9,525 of your taxable income if you were single. Income between $9,526 and $38,700 is taxed at 12 percent. If you got a raise that pushed you above that, more will be withheld because income between $38,701 and $82,500 is taxed at 22 percent.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."