Taxes and Withholding

Guide

In 1862, President Abraham Lincoln needed to get funds to help fund the Civil War.  For this, he made an order for tax withholding for the first time. Once the war was complete, this type of tax was no longer necessary and put to a stop. Then in 1943, there was a big tax hike, with many people being unable to pay. Implementing the tax system we use today was the best option at that time to ensure payment of taxes. These are the origins of income tax withholding.

Understanding Employment Taxes

One thing that all business owners and employees have in common is the requirement to pay taxes. There are a range of different taxes that employers remit to the Internal Revenue Service throughout the year. The most prevalent payroll taxes are withholding taxes.

Employers are responsible for making sure that all the relevant bodies receive withholding tax from employee wages. Withholding tax is what the employer will withhold from employee wages. This type of tax is a requirement of the government. It can fit into two categories, resident withholding tax and non-resident withholding tax.

Income tax withholding is usually a set amount of a monthly paycheck. To determine the amount for withholding from wages, employees need to fill us the IRS Form W-4. This form offers guidance to the employer on how much withholding tax to remit. If too much money has been withheld, then the employee can receive a tax refund. Alternatively, if less than the full amount is withheld, later more taxes need to be paid. Non-residents are generally subject to a total of 30% tax on their gross income which is withheld by their employers or selected withholding agents. To clarify, non-residents are aliens that are born in different countries and have not yet passed the green card test.

Federal and State Tax Withholding

Federal income tax withholding was put in place to make it easier for the government to collect income taxes before they are in the hands of the employee. Once the employee receives some, it often becomes a challenge to make sure that the remittances are complete on time. With the state taxes, there will be another version of the Form W-4 that employees will need to fill out.

With state withholding regulations, seven states do not charge any income tax. These are Alaska, Florida, South Dakota, Nevada, Washington, Texas, South Dakota and Wyoming.

Key Withheld Taxes

Two taxes are worth noting, being Social Security Tax and Medicare Tax. Social security tax withholding is at a rate of 6.2% up to an annual wage of $132,900. Medicare tax withholding is at a rate of 1.45% up to an annual wage of $200,000. Above this annual wage, the rate for Medicare tax comes down to 0.09%. This brings the tax being withheld from the federal government for Social Security and Medicare to 7.65%.

All taxpayers need to be aware of the consequences of not remitting the income tax as expected. Penalties and fines may have to be paid if less than 90% of annual income taxes are withheld for the year. These taxes are due in April.

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