How to Understand the Taxes Withheld From Your Paycheck
When you earn a paycheck, you may notice that it is not the exact amount as it would be at your hourly or salaried range. This is because of taxes. There are multiple taxes withheld which can be confusing. Taxes withheld from your paycheck are federal income tax, FICA taxes, and state income taxes.
Federal Income Tax
Federal income taxes are money that goes to the government from your paycheck for various services provided to the public. Federal income taxes are progressive. The amount you pay is based on your income, with exemptions, deductions, and credits. If you have more of these, you will end up paying your taxes on a lower amount of your income to account for your additional financial obligations. The taxes are also dependent on your filing status. This means the taxable income between married filing jointly, married filing separate returns, and single filers.
FICA Taxes
The Federal Insurance Contribution Act, or FICA is taxes that go toward Social Security and Medicare programs. Social security helps prevent income losses for groups such as retired workers or in the event of disability. Medicare covers much or all of the costs of hospice care and other healthcare in retirement. As you work and contribute to FICA, you earn Social Security Credits. To qualify for Social Security benefits, you need to accrue 40 credits and 62 years old or older.
State Income Tax
State income tax is also money that will go toward the public services of the state you live in. These differ depending on which state you live in. There are some states with no income tax; these states tend to have higher property or other taxes instead. Some states have a flat rate, but this also can depend on what they determine to be income. States will tax dividends or interest, taxable income, or gross income. There are states who follow a progressive tax like federal income taxes where the higher levels of income are taxed at a higher rate.
If you don’t understand what taxes are withheld from your paycheck, you may get frustrated that you get less than you expect. What you get after taxes are withheld is your net income, with your gross income accounted for. This is where tax season is important because if you pay more than is necessary over the year, you will get a return.
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