Withholding your taxes -- what's the right amount?
Jan 20th 2010 6:00PM
Updated Feb 6th 2010 5:28PM
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.