- Days left

Withholding your taxes -- what's the right amount?

One of the keys to avoiding penalties or other nasty surprises come tax time is to make sure your withholding is correct. Withholding can sometimes feel complicated, but it boils down to just a few issues: filing status, number of dependents, pay frequency and pay amounts.

Social Security and Medicare (sometimes referred to together as "FICA") taxes are the easiest to figure: Those taxes are simply withheld from your wages by your employers at a flat rate. For 2009, the amount withheld from your pay for Social Security is 6.2% on earnings up to $106,800. The amount withheld for Medicare is 1.45% on all earnings.

Federal income tax withholding is not a flat rate and is based on your individual circumstances. The best way to figure out the correct amount for your employer to withhold is to complete a federal form W-4 (available for download here).

You'll report basic information on the form W-4, such as your name, address, Social Security and marital status. You'll also report the number of personal exemptions you wish to claim; you figure this using the personal allowances worksheet attached to the form W-4. The basic rule is that the more allowances that you claim, the less money will be withheld from your paycheck each pay period. The number of allowances should coincide, roughly, with the number of exemptions and deductions you will claim on your tax return. If you get stuck figuring out that amount, try the IRS withholding calculator. It's not a substitute for the federal form W-4, but it can help you figure out how many exemptions to claim.

Local and state income tax withholding are generally automatic -- unless you are not a resident of the city or state where you work. If you are not, you should check the individual rules to determine what you will need to file. For example, if you live in Philadelphia but work in Wilmington, Delaware, you are still subject to the City Wage Tax even if it is not being withheld; conversely, if you live in Wilmington, Delaware, but work in Philadelphia, you are subject to the City Wage Tax which will likely be withheld for you at the employer level. Despite the loud grumblings about wage taxes in cities like New York City and Philadelphia, a large number of smaller municipalities and townships have similar tax schemes. Check with your employer to see what's being withheld and check with your local government to find out how your local taxes work.

If you've done the math correctly, there should be no surprises come tax time. However, the burden is on you to make sure you continue to have the correct withholding taken from your check. If you get married, have a baby, take on an additional job or otherwise change your financial picture, you should complete a new form W-4 so your employer knows to make changes in your withholding.

Increase your money and finance knowledge from home

Timing Your Spending

How to pay less by changing when you purchase.

View Course »

Understanding Credit Scores

Credit scores matter -- learn how to improve your score.

View Course »

TurboTax Articles

Video: Tax Guidelines About Gifting

Note: Some of the content of this video applies only to taxes prepared prior to 2012. It is included here for reference only. Find out the tax guidelines about gifting with help from TurboTax in this video on tax tips.

Video: What are Income Tax Rates?

Note: The content of this video applies only to taxes prepared for 2010. It is included here for reference only. Income tax rates change depending on both the amount of money you make and how you made it. Find out about income tax rates with help from TurboTax in this video on tax tips.

Video: How To Reduce Errors on Your Tax Return

Did you know that errors on your tax return can affect the amount of your tax bill and the amount of time it takes to get a refund? Fortunately, TurboTax helps you avoid errors AND be sure you're getting all the tax deductions and credits you deserve.

Does Your Company Need to File Form 1095-B?

A company is responsible for filing IRS Form 1095-B only if two conditions apply: It offers health coverage to its employees, and it is "self-insured." This means that the company itself pays its employees' medical bills, rather than an insurance company. A company that doesn't meet both conditions won't have to deal with Form 1095-B. Its employees might still receive a 1095-B, but from their insurer, not the employer.

Video: Who Qualifies for an Affordable Care Act Exemption (Obamacare)?

The Affordable Care Act requires all Americans to have health insurance or pay a tax penalty. But, who qualifies for an Affordable Care Act exemption? Find out more about who qualifies for an exemption from the Affordable Care Act tax penalty, how to claim an exemption on your tax return and how the Affordable Care Act may affect your taxes with this video from TurboTax.

Add a Comment

*0 / 3000 Character Maximum