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How to figure taxes withheld

How to figure taxes withheld

Along with paying employees accurately and in a timely fashion, an employer is required by law to withhold payroll taxes from their paychecks. The employee’s income is subject to federal, state, (if applicable), Social Security and Medicare (FICA) taxes. The employee’s pay stub should state the type and the current and year-to-date amount of taxes withheld. If he is unfamiliar with how taxes are withheld, he can become confused when computing them.

Figuring Federal Taxes Withheld

The employee’s federal tax withheld is based on his W-4 information (filing status and allowances) and the IRS withholding tax tables. His federal tax amount also depends on his income bracket and his pay frequency such as weekly, biweekly or semimonthly.
For example, say his filing status is single, he has two withholding allowances and his weekly pay is $500. Based on the IRS Withholding Tables for 2010, one withholding allowance for a weekly employee is $70.19. Since he is claiming two withholding allowances, multiply 70.19 by 2, which equals 140.38. Subtract $140.38 from $500 to arrive at the amount subject to withholding: $359.62. The amount of tax to withhold is $32.34 (amount in excess of $200 is $159.62 x 15 percent = $23.94 + 8.40–see pg. 39 of 2010 IRS Withholding Tables–= $32.34).

Figuring State Taxes Withheld

The employee can check with his state’s department of labor to determine if he should be charged an income tax. A few states such as Florida and South Dakota do not charge income tax. He should ensure it is not being deducted from his paycheck if this is the case.

State tax rates vary by state. The employee’s state tax withheld is based on his number of allowances, filing status, taxable income and the state withholding tax table. There is no one rule governing the tax withholding for all states.

Figuring Social Security Taxes Withheld

Social Security taxes withheld are based on 6.2% of the employee’s wages earned up to the maximum yearly limit: $106,800 for 2009 and 2010. For instance, if his biweekly paycheck is $900, calculate as follows to determine the amount deducted for that specific pay period:

$900 x 6.2% = $55.80 (social security tax amount). Once he has earned the limit for the year, the deduction ceases until the next year.

Figuring Medicare Taxes Withheld

Medicare taxes withheld are based on 1.45% of the employee’s income. The withholding continues throughout each year regardless of how much he has earned. Using the details from the example in Step 3, calculate as follows:

$900 x 1.45% = $13.05 (Medicare tax amount).

Consulting with Payroll on Taxes Withheld

The employee access an abundance of payroll information, including his state tax rate, and show him how they arrived at their computations.

Save Money with Flexible Spending Accounts

The downturn in the economy has caused a shift in consumer spending habits. This increased interest in saving money has also increased interest in Flexible Savings Accounts offered by employers.

What Type of Expenses are Eligible for a Flexible Spending Account

According to Publication 969 on the Internal Revenue Service website, a Health Flexible Spending Account (HSA) allows employees to be reimbursed for medical expenses. These flexible savings accounts allow employees to set aside pre-tax money that is used for qualifying medical expenses. The money is withdrawn from the employee’s paycheck before the taxes are taken out, thus providing the tax free benefit. There is also a second type of Flexible Spending Account called a Dependent Care Flexible Savings Account.

In Publication 502: Medical and Health Expenses, the IRS provides a complete list of all medical expenses that qualify for Flexible Spending Health Accounts. However not all employers allow every item to be claimed. For that reason, employees should obtain a complete list of qualifying expenses from their Human Resources department.

How to Calculate How Much Money to Put into a Flexible Spending Account

Employees must calculate how much money to place into an FSA at the beginning of the plan year. Employers then deduct the allocated amount in equal amounts from each paycheck. Although the IRS does not limit the amount of money individuals can put into a flexible savings account, employers sometimes do.

To determine how much money to set aside in a FSA identify the following medical expenses for the upcoming year.

  • Any dental care for all household members such as braces, dental cleanings or other dental procedures. Note that cosmetic dentistry is usually not eligible for flexible spending savings.
  • Add up all prescription medication co-pays, as well as prescription not covered by insurance.
  • Include the cost of eye exams, glasses, contact lenses and contact lens solution.
  • Estimate how much the household spends on over-the-counter medication per year such as allergy medication, cold and flu remedies and first aid items.

For all of the above expenses, estimate how much the insurance companies will pay and deduct that from the amount in the flexible savings account. Only set aside the estimated out of pocket payment for medical expenses.

What Happens to Unused Money Left in a Flexible Spending Account

One downfall for Flexible Spending Accounts is that any money left in them at the end of the calendar year is usually forfeited. Thus, it is better to underestimate than overestimate medical expenses. The IRS does allow a two and one half month extension at the end of the plan year to allow employees to use up excess money. However, it does not mandate that companies allow this and some companies choose not to. In these cases, any leftover contributions by employees are forfeited.