Federal Income Tax Payroll Deductions

by Trudy Brunot

According to the Tax Foundation, you worked the first 32 days of 2012 to pay your federal income taxes. Thanks to the 1943 Current Tax Payment Act, you get to cover your tax bill on an installment plan known as payroll deduction. The Internal Revenue Service requires employers to withhold income tax from your paychecks to make sure you give Uncle Sam his fair share.

Your Side of Deductions

You can choose how much federal income tax you want to have deducted from your wages using IRS Form W-4, Employee's Withholding Allowance Certificate. Your choice determines whether you receive a refund because you withheld too much or write a check because you underestimated what you owe. You can pick one or more personal allowances based on your marital status, the number of jobs you have and anticipated tax credits. The more personal allowances you claim, the lower the percentage of your earnings will be withheld. You also can opt to have a specific dollar amount deducted in addition to what your personal allowances dictate should be withheld.

Employer Side of Deductions

The IRS issues tax tables employers use to calculate withholding according to the information you provide on the W-4 and what you make. Not submitting the money collected from payroll deductions accurately and on time lands them a 10 percent "failure to deposit" penalty in addition to fines ranging from 2 to 15 percent of the taxes due and interest charges. Employers must consider all taxable wages, including paid vacations, severance pay, tips and fringe benefits such as tuition reimbursement, when using the withholding tables.

Exemption

If you didn't have to pay income tax the previous year and don't anticipate owing taxes next year, you can use Form W-4 to claim an exemption from withholding. An exemption, however, is valid only for one calendar year, so you must give your employer a new Form W-4 by Feb. 15. If you don't provide an updated W-4, your employer must begin to withhold your federal taxes based on your most recent pre-exemption W-4, or consider you single with no personal allowances and withhold at a higher rate.

Considerations

Make sure you don't request an exemption and personal allowances at the same time. Doing so makes your Form W-4 invalid and requires your employer to apply the highest withholding rate. Worse, it subjects you to a $500 penalty. When your life changes because you bought a house, had a child, got married or your spouse went back to work, submit a new Form W-4 to reflect additional tax credits you might claim. Discovering that you owe income tax at the end of the year is another reason to rethink your withholding. On the other hand, you may like getting a big refund, but giving too much of your money to Uncle Sam every payday means you have less to invest. The worksheet on Form W-4 helps you do a better job matching you federal tax deduction to your tax bill.

About the Author

Trudy Brunot began writing in 1992. Her work has appeared in "Quarterly," "Pennsylvania Health & You," "Constructor" and the "Tribune-Review" newspaper. Her domestic and international experience includes human resources, advertising, marketing, product and retail management positions. She holds a master's degree in international business administration from the University of South Carolina.

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