Calculating federal payroll taxes is easy once you understand a few concepts that are critical to the earnings you receive, regardless of whether you are salaried, paid by the hour, or a contractor who has chosen to have deductions applied to you. This article breaks down how federal payroll taxes seen on employee pay stubs are calculated.
How Federal Taxes Affect Different Kinds of Employees
When calculating your taxes, the type of employee you are – salaried, hourly, or contractor – is not as relevant as the amount of income you generate. The exception, of course, is that contractors and others who normally do not have taxes withheld will have a value of zero for federal tax withheld unless they specifically request otherwise.
Federal income deductions are applied to citizens based on the amount they generate annually. The lower the income, the lower the tax rate that is applied. As of 2016, anyone with an annual income greater than $ 2,250 must have federal taxes deducted from their income. Salaried employees, those who generate a fixed amount of income annually, will have a fixed amount of federal tax deducted each pay period. However, hourly employees will have a federal tax rate that is projected based on the amount of earnings they have generated in their previous pay periods. As the year progresses, employers can better gauge the total amount they anticipate the employee will earn based on their pay frequency and the number of hours they normally work during a pay period.
How deductions affect before and after amounts
Pre and post deductions are additional factors that change the amount of federal tax withheld. As stated above, federal deductions are based on the amount of gross income earned. The more you earn, the more taxes you pay. With pre-tax deduction amounts, you subtract the pre-tax amount from your gross income before the federal tax rate applies. The bottom line is that you pay federal taxes on a smaller amount, and therefore you don’t pay as much. Pre-tax amounts traditionally include some retirement savings plans, health-related deductions such as dental and college savings plans, to name a few. After-tax deductions are the remaining gross amount to which taxes are applied after all pre-tax amounts have been subtracted.
What is the Federal Insurance Contributions Act (FICA)?
Other federal deductions paid by salaried and hourly employees at all levels include FICA, the Federal Insurance Contribution Act, which appears on each pay stub as two separate entries. The first entry represents the social security tax and the second entry is the Medicare tax, sometimes referred to as OASDI. Both taxes are applied at a flat percentage rate with Social Security at 6.2% and Medicare tax at 1.45%. While there is a limit on the amount of social security that can be withdrawn, there is no such limit for Medicare tax. The more you earn, the more you pay.
Understanding how to calculate your federal taxes is easy once you:
1. Identify the amount of gross income
2. Distinguish between pre and post deductions that are removed from your income.
3. Subtract the amounts before tax from your gross income.
4. Apply the federal tax rate, Medicare tax, and Social Security tax to gross earned income.
