On March 30th I worked with my boss helping to get our payroll recalculated for April. Most people should see an increase in their paycheck due to the Making Work Pay Tax Credit. However, if you fall into any of these categories, you should make sure enough withholding taxes are being taken from your check: 1) You are an employee with two concurrent jobs, 2) You and your spouse both work, or 3) You can be claimed as a dependent (since you are not eligible for the MWP Tax Credit). Review How Do I Adjust My Tax Withholding from the IRS to learn more about making sure enough taxes are being withheld from your paycheck.
I used to think the money withheld from our paychecks was very mysterious. But when I learned how it’s figured out several years ago, I realized it’s not that big of a mystery, and now that we have the Internet, it’s easy for anyone to have access to the guides that can help you calculate your withholding for yourself.
Here’s how withholding works. Let’s say you make $3000 per month gross, and you get paid twice monthly (semi-monthly), both checks in equal amounts of $1500. Your first deductions are to Social Security and Medicare. Your employer pays half, and you pay half. Unless you are self-employed, then you pay the whole amount on your own (you end up being able to deduct 50% as an expense – if I’m understanding correctly).
Social Security takes 12.4% total. Medicare is 2.9% total. As I mentioned, you pay half, so your portion is 6.2% for SS, and 1.45% for Medicare (your employer contributes the other halves).
Your paystub looks like this now:
Now in order to see how much will be taken by federal, we have to know what you put on your W-4.
You’ll be looking at Publication 15-T for 2009 to find the amount, based on what you put on your W-4. This publication is the New Wage Withholding and Advance Earned Income Credit Payment Tables that shows employers the new amounts to take from employee’s checks. Usually this information is included in Publication 15, or Circular E, Employer’s Tax Guide. But due to the Making Work Pay Tax Credit, the IRS had to issue a supplemental edition of the guide, and new tax tables.
Usually you figure out your status and exemptions when you fill out your W-4 which asks you a series of questions and you come up with a number of exemptions to claim based on your answers.
Let’s say you’re married and have three children. But since your husband is self-employed, you want to have the highest amount taken from your paycheck in order to help with the taxes due at the end of the year.
So you claim single, and no exemptions, so the highest amount of tax will be taken from your check.
Look at the publication that I linked to above, find the Single and Semi-Monthly tables. If you were claiming married and paid weekly, you would find those tables. But you’re looking for Single and Semi-Monthly, so find the tables with the heading that is shown in the image below:
Look for the amount of your semi-monthly paycheck and in this case, it would be between $1500 and $1520. The amount that your employer should deduct from your check for federal withholding will be $110.
Now you figure out the state withholding based, again, on what you put on your state’s equivalent to the Federal W-4. In Arizona, we call ours an A-4. In Arizona, we can choose several percentages, depending on how much money you earn. If you earn under $15,000 you can choose 10, 19, 23, 25 or 37% of your federal to be withheld for state. If you make over $15,000, you can choose 19, 23, 25, 31, or 37% of your federal to be withheld for state.
Let’s say you live in Arizona, and choose the largest amount to be deducted, 37%.
Take your $110 federal deduction and multiply it by 37%. You should come up with $37.40.
Now your paystub looks like this:
The amount of my check actually went down (instead of up, like yours should do), because I took the opportunity to have more taxes taken from my check since we are going to have to make estimated payments as it is. I figured it would be just as easy to have them take a larger amount from my paycheck.
All of our employees will be happy to see that their checks have increased by at least a few dollars.
Having this knowledge can be very helpful if you want to have more taxes taken from your paycheck. Let’s say this year you had to pay $500 in income taxes. Most people don’t like to have to pay come April, so you can use these tables to calculate what status you should claim to have more taxes withheld.
On the other hand, if you get a huge refund every year, say in the thousands or even in the hundreds, there is no reason why the government should have your money all year round. Use the tables to figure out what status and exemptions to claim so that less money will be withheld from your check. I used to think you had to fill out the W-4 truthfully. If you were married with two children, then you had to claim Married and put down two exemptions for your two children. And one for yourself, and one for your spouse. But really, with access to the tax tables, you can have whatever amount taken that you please, as long as you know what status and how many exemptions to claim. Your employer is bound by law to allow you to make changes to your W-4 whenever you desire. You can also request that your employer take an additional lump sum amount each payday.
If you are self-employed, you will be able to take the Working Tax Credit on your 2010 income taxes.
Hopefully this will be helpful to someone out there.
This post was included in the 201st Carnival of Personal Finance on (April 20th, 2009). Thank you Mighty Bargain Hunter for your effort in hosting this event and including my post!
*Please remember I am not a tax professional. The information in this post is from my own personal experience and based on research for my personal situation.*