Taxes and Withholding

Guide

Governments have been battling tax collection for decades. If all the control was in the hand of the employer, valuable resources would be spent chasing up millions of people just to get the bare minimum.  Withholding tax became legislation in the 1940s when the government was collecting funds for the war. Today, the withholding tax offers the government some relief to the challenge of collecting taxes from employees. Income tax withholding requires an employer to withhold a certain amount of an employee’s wages and then make payment to the government directly. This leaves a balance for employees to pay on their own rather than the full amount.

There are to withholding tax options that offer the U.S. government income from wages. The regulations for withholding taxes are by the Internal Revenue Service (IRS) as follows: –

  1. The U.S. Resident Withholding Tax
    This is tax withheld from the personal income of U.S. residents that all employers in the United States collect. Whatever balance of taxes remain are the responsibility of the employees, who need to make payment every year in April. Two scenarios can result from this. Where the amount of tax withheld by the employer is too much, then the employee is due to receive a tax refund. Where the amount held is too little, then the employee will owe the IRS and have to settle the balance.
  1. The Non-Resident Withholding Tax
    Withholding taxes make sure that non-residents, which is individuals who are foreign born and without a green card, pay their taxes. All their income sources are taken into consideration, and withholding taxes from the employee. This income includes earnings from dividends as well as from interest in any securities they hold.

Several factors affect the total amount withheld from pay check. It is essential for the employee to work with professionals who are clear on how to make the right calculations. In the ideal situation, around 90% of taxes should be withheld. This ensures that it is difficult for any employee to miss our on paying their income taxes.

It is possible to calculate pay check withholding by following some simple steps.

  1. Calculate the gross pay which can be found on the W-4 form for every employee. Gross pay for salaried employees is calculated on an annual basis. For hourly employees, the rate is calculations basis is the number of working hours per week as well as an overtime earned.
  2. The gross pay should then have adjustments for social security wages. This is due to the exclusion of these from the withholding and income taxes.
  3. With the amount left over, tax tables can be used to calculate the federal income tax withholding amount.
  4. There are some additional tax withholding deductions for factoring in, such as anything for retirement plans, charitable donations or even health plan coverage.

It may appear that withholding tax is out of the control of the employee, however, it is possible to lower your tax bill even when there is withholding tax. This requires paying attention to certain expenses, including interest payments on mortgage or charitable donations for example. With these reflected as an increase in allowances, an employee can retain more in their pay check.

Related Articles