Withholding refers to the taxes your employer is legally required to take out of your paychecks. This includes federal income tax, Medicare tax, Social Security tax and applicable state taxes; the Internal Revenue Service collects the first three taxes, while the respective state revenue agency oversees state income tax. How your withholding affects your taxes depend on the type of tax.
To help your employer accurately calculate your federal income tax withholding, the IRS requires you to fill out a W-4 form and give it to your employer. Federal income tax withholding depends on the number of allowances and filing status you put on the form and the IRS Circular E tax-withholding table that matches that information, plus your wages and pay period. Many states follow federal procedures for state income tax withholding, except that employees complete a state withholding form, which their employer uses with a state tax-withholding table to figure out how much to withhold. Some states don’t use a specific form; an employer can use the W-4 instead for state purposes. The state might require employers to withhold at a flat percentage with no form or tax-withholding table use.
The filing status and number of allowances that you claim on your W-4 and state withholding form play a large role in the amount of taxes that are withheld from your pay. The amount withheld also affects whether you owe the IRS or state revenue agency when you file your tax return. This is because each personal allowance you claim gives you a specific amount that reduces your taxable wages. If you claim allowances that you are not entitled to, you may end up owing taxes. If you claim fewer allowances than you qualify for, you may receive a refund because you overpaid taxes during the withholding process. Claiming married as your filing status puts you in a lower tax bracket than single. If you qualify for and claim head of household status, this puts you in a lower tax bracket as well.
If you fail to fill out a W-4, the IRS authorizes your employer to withhold federal income tax at single status with zero allowances; this is the highest tax bracket. If this information is incorrect, you might get a refund when you file your tax return. This same process applies to state income tax withholding if the state uses a withholding process that is comparable to federal income tax. Revisit your W-4 and state withholding form whenever you experience changes in your personal or financial situation. Complete new forms and submit them to your employer if necessary.
Medicare and Social Security taxes are commonly called FICA taxes because the Federal Insurance Contributions Act mandates their collection. FICA withholding is done at flat percentages of your wages each pay period. Therefore, they do not affect your tax return in the way that federal or state income tax does. Your employer withholds the specific amounts the government requires for the year; this process does not affect whether you get a refund or owe the government come tax time.
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