How does withholding tax work

how does withholding tax work

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Form W-4

A new employee files a Form W-4 with the employer to provide a Social Security number, name, address and the number of dependents for withholding purposes. The employee signs this form, authorizing the employer to withhold money from his salary or wages to cover the amount established by federal tax tables. The tables base the withholding on the amount of income and the pay period as well as the number of dependents. Weekly, biweekly and monthly are common pay periods.

Other Withholding

In addition to federal income taxes, often called FIT, the employer withholds state income tax, if applicable, and FICA or Federal Insurance Contributions Act, taxes. FICA taxes cover Social Security and Medicare, providing retirement funds and medical care for your future. The percentage of FICA taxes in 2010 is 7.65. The employer matches this amount. The total submitted to the IRS is 15.3 percent in 2010. A Social Security temporary tax reduction of 2 percent applies for 2011.

Form W-2

At the end of the calendar year or at the end of your employment with each

employer, you receive a Form W-2 Tax and Wage Statement. This is your official document for filing federal income taxes. The W-2 provides the total amount of money you made with the employer for the year and the total taxes withheld. Federal and FICA tax information is to the right on the form and state tax information is along the bottom in a horizontal row. You should receive a W-2 form for each place of employment. Employers may delay these until the first week in February in the year following employment.

Filing Federal Income Taxes

The employee adds all income from the W-2 forms to arrive at a figure for IRS form 1040EZ, 1040A or 1040 for wages or salaries. The 1040 form balances or reconciles your taxes each year. Adding all federal taxes withheld by each employer tells you how much money is in your IRS account. You complete the IRS form and determine how much you owe in taxes based on your income and dependents. Once you subtract the amount you paid, you know whether you owe more money or if you will receive a refund.

Source: ehow.com

Category: Taxes

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